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Flashcards in GASB Concepts, Bond Complications, & Valuation of Assets Deck (18):
1

Which of the following is the paramount objective of financial reporting by state and local governments?
A. Reliability.
B. Consistency.
C. Comparability.
D. Accountability.

D. Accountability.

GASB Concept Statement No. 1 defines two paramount objectives for financial reporting in government: (1) Accountability and (2) interperiod equity. Therefore, "Accountabilty" is the correct answer to this question. Concept Statement No. 1 describes six characteristics of effective financial reporting: (1) understandability, (2) reliability, (3) relevance, (4) timeliness, (5) consistency, and (6) comparability (TRUCCR).

2

According to GASB's conceptual framework, the primary users of the general purpose external financial report do not include

A.
Taxpayers.

B.
Bond insurers.

C.
School boards.


D.
Internal managers.

GASB Concepts Statement No. 1 defines the primary users of the general purpose external financial report as the citizenry (e.g., taxpayers), legislative and oversight bodies (e.g., school boards), and investors and creditors (e.g., bond insurers). Typically, internal managers who have access to information through internal reporting are not considered primary users.

3

Which event(s) is(are) supportive of interperiod equity as a financial reporting objective of a governmental unit?
I. A balanced budget is adopted.

II. Residual equity transfers out equal residual equity transfers in.

A. I only
B. II only
C. Both I and II
D. Neither I nor II

A. I only

The adoption of a balanced budget supports interperiod equity because it is an attempt to ensure that the current generation of citizens does not shift the burden of paying for current-year services to future-years' taxpayers (GASB Concepts Statement 1).

Residual equity transfers are nonrecurring or nonroutine transfers of equity between funds (GASB Codification 1800.102). These transfers occur within one accounting period and do not support interperiod equity as an objective of financial reporting.

4

According to GASB's conceptual framework, which of the following is not an element of the Statement of Financial Position?

A.
Net position

B.
Net assets

C.
Assets

D.
Liabilities

B.
Net assets

GASB Concepts Statement No. 4 identifies the following five elements of the Statement of Financial Position: (1) assets, (2) liabilities, (3) deferred inflows of resources, (4) deferred outflows of resources, and (5) net position. Since net assets are the difference between assets and liabilities, GASB prefers the term "net position," which is the difference between assets and deferred outflows and liabilities and deferred inflows.

5

Which of the following is voluntary information within a general purpose external financial report?

A.
Basic financial statements

B.
Notes to basic financial statements

C.
Required supplemental information

D.
Supplemental information

D.
Supplemental information

GASB Concepts Statement No. 3, basic financial statements, the accompanying notes to the basic financial statements, and required supplemental information are essential information and therefore required in general purpose external financial reporting. Supplemental information is useful but not required. Service efforts and accomplishment information are classified as supplemental information and are therefore voluntarily reported.

6

The City of Palo Alto's Service Efforts and Accomplishments Report for Fiscal Year 2010 reported that the average response to fire calls within 8 minutes occurred on 90% of the fire calls in 2010. This rate met the benchmark target goal of 90%. According to GASB's conceptual framework, this information is classified as a measure of

A.
Effort.

B.
Output.

C.
Outcome.

D.
Efficiency.

C.
Outcome.


The example in the question is an outcome measure. Outcome measures indicate the accomplishments or results that occur because of the services provided.

Effort:

Measures of effort are the amount (quantity) of financial and nonfinancial resources that are applied to a service. Example: the amount of salaries paid to firefighters.

Efficiency:
Efficiency measures related efforts to the output of services. Example: the cost per fire call answered.

Output:

Measures of output are the quantity of service provided. Example: the number of fire calls responded to by firefighters

7

Interperiod equity is an objective of financial reporting for governmental entities. According to the Governmental Accounting Standards Board, is interperiod equity fundamental to public administration, and is it a component of accountability?
Fundamental to public administration Component of accountability
Yes No
No No
No Yes
Yes Yes

Fundamental to public administration Component of accountability

Yes Yes

GASB Concepts Statement No. 1 states that interperiod equity is a basic component of accountability and fundamental to public administration.

8

On June 1 of the current year, Cross Corp. issued $300,000 of 8% bonds payable at par with interest payment dates of April 1 and October 1. In its income statement for the current year ended December 31, what amount of interest expense should Cross report?
A. $6,000
B. $8,000
C. $12,000
D. $14,000

D. $14,000

*the dates of the payments don't matter for the amount of months are recognized.

6/1-12/31 = 7 months

Without a discount or premium, interest expense is simply the fraction of the year the bonds were outstanding, multiplied by the interest rate and total face value outstanding. $14,000 = (7/12)(.08)($300,000).

The fact that interest is paid April 1 and October 1 does not alter that fact. Under accrual accounting, the debtor firm must recognize the total interest cost in the year it was incurred. The payment dates are not relevant to the recognition of the expense. At December 31 of the current year, the firm will accrue three months of interest (Oct. 1 - Dec. 31, or $6,000) but that amount is included in the $14,000 amount.

9

On January 2, year 4, Gill Co. issued $2,000,000 of 10-year, 8% bonds at par. The bonds, dated January 1, year 4, pay interest semiannually on January 1 and July 1. Bond issue costs were $250,000.
What amount of bond issue costs are unamortized at June 30, year 5 assuming the straight‐line method?

A. $237,500
B. $225,000
C. $220,800
D. $212,500

D. $212,500

The bond term is 10 years. At 6/30/05, 8 1/2 years remain in the bond term. Thus, $212,500 [$250,000(8.5)/10] remain unamortized.

10

On November 1, 20x5, Mason Corp. issued $800,000 of its 10-year, 8% term bonds dated October 1, 20x5. The bonds were sold to yield 10%, with total proceeds of $700,000 plus accrued interest. Interest is paid every April 1 and October 1. What amount should Mason report for interest payable in its December 31, 20x5 balance sheet?
A. $17,500
B. $16,000
C. $11,667
D. $10,667

B. $16,000

One month of accrued interest was collected from the bondholders at issuance for the period October 1 - November 1, and interest for the next two months to December 31 was accrued.
Total accrued interest is $16,000 = $800,000(.08)(3/12).

11

On June 30, 20x5, Huff Corp. issued at 99, 1000 of its 8%, $1,000 bonds. The bonds were issued through an underwriter to whom Huff paid bond issue costs of $35,000.
On June 30, 20x5, Huff should report the bond liability at

A. $955,000
B. $990,000
C. $1,000,000
D. $1,025,000


A. $955,000

The net carrying value equals total face value less the discount less the bond issue costs. The discount is implied in the "99" price which is stated as a percent of face value: $955,000 = (.99 price)(1000 bonds)($1,000 face value) − $35,000.

12

Dixon Co. incurred costs of $3,300 when it issued, on August 31, 20x5, 5-year debenture bonds dated April 1, 20x5.
Dixon uses the straight-line method to amortize bond issue costs. By what amount is 20x5 interest expense increased by the amortization of bond issue cost?

A. $220
B. $240
C. $495
D. $3,300

The bonds were dated 4/1 but weren't issued until 8/31/20X5.

How many months is the bond outstanding?
12*5= 60

How many months has passed before the bond was issued?
4/1-8/31= 5

60-5= 55 Bond life term

Amount of interest expense is increased by the amortization of bond issue cost?

"When a bond is sold at a discount, the amount of the bond discount must be amortized to interest expense over the life of the bond. Since the debit amount in the account Discount on Bonds Payable will be moved to the account Interest Expense, the amortization will cause each period's interest expense to be greater than the amount of interest paid during each of the years that the bond is outstanding."

[(4/55)*3300]= 240



13

On December 31, 20x5. Cobb issued 2,000 of its 10%, $1,000 bonds at 99. The issuance price established a bond discount of $20,000. In connection with the sale of these bonds. Cobb paid the following expenses:

Legal and accounting fees $45,000
Printing of the prospectus 55,000
Underwriting fees 85,000
In Cobb's December 31, 20x5 balance sheet, bond issue costs total

A. $120,000
B. $130,000
C. $160,000
D. $185,000

bond issue costs total:

Legal and accounting fees $45,000
Printing of the prospectus 55,000
Underwriting fees 85,000

D. $185,000

14

On January 31, year 4, Beau Corp. issued $300,000 maturity value, 12% bonds for $300,000 cash. The bonds are dated December 31, year 3, and mature on December 31, year 10. Interest will be paid semiannually on June 30 and December 31.
What amount of accrued interest payable should Beau report in its September 30, year 4 balance sheet?

A. $27,000
B. $24,000
C. $18,000
D. $9,000

D. $9,000

1. Assume that the payment that was supposed to be made in June was paid.

8-5(months before payment)=3

[(3/12)*36000]= 9,000

15

On April 1, 20x4, Hill Corp. issued 200 of its $1,000 face value bonds at 101 plus accrued interest. The bonds were dated November 1, 20x3, and bear interest at an annual rate of 9% payable semiannually on November 1 and May 1. What amount did Hill receive from the bond issuance?
A. $194,500
B. $200,000
C. $202,000
D. $209,500

D. $209,500

1. You're on track
Bond Payable
1000*1.01=1010*200=202,000
Accrued Interest
11/1/X4-3/31/X5= 5 months

[(5/12)*(200,000*.09)]=7,500

202,000+7,500= 209,500

16

On July 1, 2005, Eagle Corp. issued 600 of its 10%, $1,000 bonds at 99 plus accrued interest. The bonds are dated April 1, 2005 and mature on April 1, 2015. Interest is payable semiannually on April 1 and October 1.
What amount did Eagle receive from the bond issuance?

A. $579,000
B. $594,000
C. $600,000
D. $609,000

D. $609,000

1. You did good, but forgot to get the interest amount for the bond without the discount or premium.

Bond Payable
1. 1000*.99=990*600=594000
Accured Interest
1. [(3/12)*.1(600,000) = 15,000

=609,000

CPA:
.99($1,000)(600) + .10(3/12)(600)($1,000) = $609,000.

17

A plant asset under construction by a firm for its own use was completed at the end of the current year. The following costs were incurred:
Materials $60,000
Labor 30,000
Incremental overhead 10,000
Capitalized interest 20,000
The asset has a service life of 10 years, estimated residual value of $10,000, and will be depreciated under the double declining balance method. At completion, the asset was worth $105,000 at fair value. What amount of depreciation will be recognized on the asset in total over its service life?

A. $105,000
B. $120,000
C. $95,000
D. $90,000

C. $95,000

1. If it says "capitalized interest" then you add it into the costs

2. Total Costs - FV=15,000
Can't depreciate over FV.

3. Minus residual costs:
120-15-10=95

C. $95,000

18

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

C.
$24,980

4000+(6000*2.58)+2000+3500=24980