Notes Rec, Current Liabilites, and Stock 14 Flashcards Preview

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Flashcards in Notes Rec, Current Liabilites, and Stock 14 Deck (20):
1

The summary of significant accounting policies should disclose the
A. Maturity dates of noncurrent debts.
B. Terms for convertible debt to be exchanged for common stock.
C. Concentration of credit risk of all financial instruments by geographical region.
D. Criteria for determining which investments are treated as cash equivalents.

D. Criteria for determining which investments are treated as cash equivalents.

The accounting policy footnote discloses both the methods of accounting used by the firm and other information useful for understanding the bases under which the financial statements were prepared. How the firm classifies investments as cash equivalents is one such basis; it is disclosed in the policy footnote. The other answer alternatives are disclosures about specific aspects of particular accounts.

2

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


A. Basis of profit recognition on long-term construction contracts.


The summary of significant accounting policies footnote presents information that helps assist users in understanding the recognition, measurement, and disclosure decisions made by the firm.
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.

A user is much better equipped to evaluate the firm's financial performance and position with the knowledge of the revenue recognition method used by the firm

3

Neely Co. disclosed in the notes to its financial statements that a significant number of its unsecured trade account receivables are with companies that operate in the same industry. This disclosure is required to inform financial statement users of the existence of
A. Concentration of credit risk.
B. Concentration of market risk.
C. Risk of measurement uncertainty.
D. Off-balance sheet risk of accounting loss.

A. Concentration of credit risk.

This disclosure will give the financial statement reader information about concentration of credit risk related to the receivables that are all in the same industry.

B. Concentration of market risk.

Market risk is not industry specific. All companies have market risk so disclosure is not providing any additional information to the user. What is risky is all the receivables in the same industry.

4

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

C. 5


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.

5

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.

B. The notes to the financial statements.

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).

6

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.

D. All those other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business.

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

7

Which of the following information should be disclosed in the summary of significant accounting policies?
A. Refinancing of debt subsequent to the balance sheet date.
B. Guarantees of indebtedness of others.
C. Criteria for determining which investments are treated as cash equivalents.
D. Adequacy of pension plan assets relative to vested benefits.

C. Criteria for determining which investments are treated as cash equivalents

All four answers reflect information that should be disclosed in the footnotes, but only information about general accounting policies (measurement and recognition) should appear in the footnote referred to in the question.


The policy concerning which investments are treated as cash equivalents is an accounting policy.

8

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.

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.

9

Acme Co.'s accounts payable balance at December 31 was $850,000 before necessary year-end adjustments, if any, related to the following information:
At December 31, Acme has a $50,000 debit balance in its accounts payable resulting from a payment to a supplier for goods to be manufactured to Acme's specifications.

Goods shipped F.O.B. destination on December 20 were received and recorded by Acme on January 2. The invoice cost was $45,000.

In its December 31 balance sheet, what amount should Acme report as accounts payable?

A. $850,000
B. $895,000
C. $900,000
D. $945,000

C. $900,000

The $50,000 advance is not related to accounts payable, even though it was made to a supplier for which Acme would have accounts payable.

It is a prepayment.

Removing the $50,000 debit increases the accounts payable balance by that amount. The $45,000 shipment is not part of the inventory of Acme as of December 31 nor is it a liability (accounts payable) because title to the goods did not transfer to Acme until January 2. FOB destination means that title does not transfer until goods reach their destination. Acme treated this item correctly because it was recorded January 2. Therefore, the correct accounts payable balance is $900,000 ($850,000 before adjustment + $50,000

10

Bake Co.'s trial balance included the following at December 31, year 1:
Accounts payable $ 80,000
Bonds payable, due year 2 300,000
Discount on bonds payable 15,000
Deferred income tax liability 25,000
The deferred income tax liability is not related to an asset for financial accounting purposes and is expected to reverse in year 2. What amount should be included in the current liability section of Bake's December 31, year 1 balance sheet?
A. $365,000
B. $390,000
C. $395,000
D. $420,000

Deferred income tax liability 25,000
Accounts payable $ 80,000
Bonds payable, due year 2 300,000
Discount on bonds payable (15,000)
= 390$

All current liabilities

11

Which of the following is generally associated with payables classified as accounts payable?
Periodic payment of interest Secured by collateral
No No
No Yes
Yes No
Yes Yes


Periodic payment of interest Secured by collateral
No No

Accounts payable is also labeled: accounts payable, trade. The accounts payable account is used only for routine trade payables, typically for purchases of inventory and supplies.

Interest accrued is recorded in accrued interest payable, and secured debt is recorded in other specifically-labeled liability accounts.

12

The balance in Kemp Corp.'s accounts payable account at December 31, 20X5 was $900,000 before any necessary year-end adjustment relating to the following:

Goods were in transit to Kemp from a vendor on December 31, 20X5. The invoice cost was $50,000. The goods were shipped F.O.B. shipping point on December 29, 20X5 and were received on January 4, 20X6.

Goods shipped F.O.B. destination on December 21, 20X5 from a vendor to Kemp were received on January 6, 20X6. The invoice cost was $25,000.

On December 27, 20X5, Kemp wrote and recorded checks to creditors totaling $40,000 that were mailed on January 10, 20X6.

In Kemp's December 31, 20X5 balance sheet, the accounts payable should be

A. $940,000
B. $950,000
C. $975,000
D. $990,000

The correct answer, $990,000, is the balance in the AP account at year-end, which equals: $900,000 (bal. before adjustment) + $50,000 (in transit, FOB shipping point) + $40,000 (checks not sent as of Dec. 31).

*WTF CPA

13

In its 20X5 financial statements, Cris Co. reported an interest expense of $85,000 in its income statement and a cash amount of $68,000 paid for interest in its cash flow statement. There was no prepaid interest or interest capitalization at either the beginning or end of 20X5. The accrued interest at December 31, 20X4 was $15,000.
What amount should Cris Co. report as accrued interest payable in its December 31, 20X5 balance sheet?

A. $2,000
B. $15,000
C. $17,000
D. $32,000

D. $32,000

BOY 15
Incl: 17
EOY Bal: 32

D. $32,000

14

Lyle, Inc. is preparing its financial statements for the year ended December 31, 20X4. Accounts payable amounted to $360,000 before any necessary year-end adjustment related to the following:

At December 31, 20X4, Lyle has a $50,000 debit balance in its accounts payable to Ross, a supplier, resulting from a $50,000 advance payment for goods to be manufactured to Lyle's specifications.
Checks in the amount of $100,000 were written to vendors and recorded on December 29, 20X4. The checks were mailed on January 5, 20X5.
What amount should Lyle report as accounts payable in its December 31, 20X4 balance sheet?

A. $510,000
B. $410,000
C. $310,000
D. $210,000

Balance before adjustments
$360,000
Plus the advance, which should be placed in an asset account: advances to supplier. The $50,000 is added to accounts payable because accounts payable was debited on payment of the advance.
50,000
Include the amounts for checks written but not mailed. This amount should be reinstated to cash.
100,000
Equals correct ending balance
$510,000

WHAT THE NUGGETS CPA!

15

`Wilk Co. reported the following liabilities at December 31, 20X1:
Accounts payable trade $750,000
Short-term borrowings 400,000
Bank loan, current portion $100,000 3,500,000
Other bank loan, matures June 30, 20X2 1,000,000
The bank loan of $3,500,000 was in violation of the loan agreement. The creditor had not waived the rights for the loan. What amount should Wilk report as current liabilities at December 31, 20X1?

A. $1,250,000
B. $2,150,000
C. $2,250,000
D. $5,650,000

D. $5,650,000

Current liabilities are obligations of an entity that are expected to require the use of current assets or the providing of services (or the creation of another liability that will require the use of current assets or provision of services) during the next year or operating cycle, whichever is longer.
For Wilk Co., accounts payable-trade, short-term borrowings, and the other bank loan, which matures during next year, are all (conventional) current liabilities.
The bank loan for $3,500,000 also must be classified in total as a current liability because Wilk is in violation of the terms of the loan agreement, and the creditor has not waived its right to demand immediate loan payment.
The sum of the four accounts is $5,650,000

16

Hemple Co. maintains escrow accounts for various mortgage companies. Hemple collects the receipts and pays the bills on behalf of the customers. Hemple holds the escrow monies in interest-bearing accounts. They charge a 10% maintenance fee to the customers based on interest earned. Hemple reported the following account data:
Escrow liability beginning of year $ 500,000
Escrow receipts during the year 1,200,000
Real estate taxes paid during the year 1,450,000
Interest earned during the year 40,000
What amount represents the escrow liability balance on Hemple's books?

A. $290,000
B. $286,000
C. $214,000
D. $210,000

This question requires you to think about how liabilities are accrued. If Hemple is holding funds for a mortgage company, it is a liability for Hemple. The liability would be increased when escrow monies are deposited and decreased when there is payment made on behalf of customers. The funds are also earning interest and 10% of that interest is charged as a maintenance fee to the customer. A T-Account will help demonstrate this:
Escrow Liability
500,000 Beginning Balance
Taxes paid from escrow 1,450,000 1,200,000 Escrow receipts
Maintenance fees 4,000 40,000 Interest earned
286,000 Ending Balance

17

On March 1, 20x5, Rya Corp. issued 1,000 shares of its $20 par value common stock and 2,000 shares of its $20 par value convertible preferred stock for a total of $80,000.
At this date, Rya's common stock was selling for $36 per share, and the convertible preferred stock was selling for $27 per share.
What amount of the proceeds should be allocated to Rya's convertible preferred stock?

A. $60,000
B. $54,000
C. $48,000
D. $44,000



C. $48,000

The total proceeds are allocated to the two securities based on relative market values.
Market value of common: 1,000($36) = $36,000
Market value of preferred: 2,000($27) = 54,000
Total market value $90,000
Allocation of proceeds to preferred = ($54,000/$90,000)$80,000 = $48,000

18

An individual contracts for the purchase of 200 shares of $10 par common stock at a subscription price of $15. After making payments totaling $1,200, the subscriber defaults. Shares are issued in proportion to the amount of cash paid by the investor. The summary journal entry to record the net effect of these two transactions includes:

A.
Debit share purchase contract receivable $1,800.

B.
Credit common stock $2,000

C.
Credit paid in capital in excess of par on common, $400

D.
Credit share purchase contract receivable $600

C.
Credit paid in capital in excess of par on common, $400

200*15=3000

Only paid 1200
1200/3000= 80

80*10= 800
80*15=1200

1200-80=400 additional paid in capital

19

When collectability is reasonably assured, the excess of the subscription price over the stated value of the no par common stock subscribed should be recorded as
A. No par common stock.
B. Additional paid-in capital when the subscription is recorded
C. Additional paid-in capital when the subscription is collected
D. Additional paid-in capital when the common stock is issued

B. Additional paid-in capital when the subscription is recorded

This is one of the few examples of a recognized executory contract. Given that collectability is not an issue, the recording of a stock subscription is essentially the same as the entry for issuing stock for cash, except that a receivable stands in place of cash, and common stock subscribed stands in place of common stock.
Common stock subscribed is an owners' equity account that is replaced by common stock upon issuance. Any additional paid-in capital is recorded when the contract is signed or recorded, just as if cash were received at that point.

20

On July 1, 20x5, Cove Corp., a closely-held corporation, issued 6% bonds with a maturity value of $60,000, together with 1,000 shares of its $5 par value common stock, for a combined cash amount of $110,000.
The market value of Cove's stock cannot be ascertained. If the bonds were issued separately, they would have sold for $40,000 on an 8% yield to maturity basis.

What amount should Cove report for additional paid-in capital on the issuance of the stock?

A. $75,000
B. $65,000
C. $55,000
D. $45,000

B. $65,000

The amount of the proceeds allocated to the stock is $70,000 ($110,000 - $40,000). When only one of the two securities has a known market value, that value is allocated to that security and the remaining proceeds are allocated to the security without a known market value.
The total par value of 1,000 shares of $5 par stock is $5,000. Therefore, $65,000 ($70,000 - $5,000) is recorded in additional paid-in capital on common stock.