Practice Exam 7.13.23 Flashcards
Park Co.’s wholly owned subsidiary, Schnell Corp., maintains its accounting records in euros. Because all of Schnell’s branch offices are in London, its functional currency is the British pound. Remeasurement of Schnell’s Year 4 financial statements resulted in a $7,600 gain, and translation of its financial statements resulted in an $8,100 gain. What amount should Park report as a foreign currency transaction gain in its income statement for the year ended December 31, Year 4?
A. $15,700
B. $0
C. $8,100
D. $7,600
D. $7,600
The financial statements must be remeasured into the functional currency using the temporal method and then translated into the reporting currency using the current rate method. The $7,600 gain arising from remeasurement should be reported in current income. The $8,100 translation gain should be reported in other comprehensive income and is not reflected in income.
Grid Corp. acquired some of its own common shares at a price greater than both their par value and original issue price but less than their book value. Grid uses the cost method of accounting for treasury stock. What is the impact of this acquisition on total equity and the book value per common share?
C. Decrease Increase
Under the cost method, the acquisition of treasury stock is recorded as a debit to treasury stock and a credit to cash equal to the amount of the purchase price. This transaction results in a decrease in both total assets and total equity because treasury stock is a contra-equity account. Moreover, if the acquisition cost is less than book value, the book value per share will increase. For example, if equity is $100, 10 shares are outstanding, and 5 shares are purchased for $45, the book value per share will increase from $10 ($100 ÷ 10) to $11 [($100 – $45) ÷ 5].
Glade Co. leases computer equipment to customers under sales-type leases. The equipment has no residual value at the end of the lease, and the leases do not contain purchase options. At lease inception, the fair value of the leased computer equipment equals its carrying amount. Glade wishes to earn 8% interest on a 5-year lease of equipment with a fair value of $323,400. The present value of an annuity due of $1 at 8% for 5 years is 4.312. What is the total amount of interest revenue that Glade will earn over the life of the lease?
A. $139,450
B. $129,360
C. $51,600
D. $75,000
C. $51,600
To earn 8% interest over the lease term, the annual payment must be $75,000 ($323,400 fair value at the inception of the lease ÷ 4.312 annuity factor). Given no residual value and no purchase option, total lease payments over the lease term will be $375,000 ($75,000 payment × 5 years). The entire difference between the gross lease payments received ($375,000) and their present value ($323,400 net investment in the lease) is the interest revenue recognized over the entire lease term ($375,000 – $323,400 = $51,600).
On January 1, Year 1, Bay Co. acquired a land lease for a 21-year period with no option to renew. The lease required Bay to construct a building in lieu of rent. The building, completed on January 1, Year 2, at a cost of $840,000, will be depreciated using the straight-line method. At the end of the lease, the building’s estimated fair value will be $420,000. What is the building’s carrying amount in Bay’s December 31, Year 2, balance sheet?
A. $820,000
B. $819,000
C. $798,000
D. $800,000
C. $798,000
General improvements to leased property should be capitalized as leasehold improvements and amortized in accordance with the straight-line method over the shorter of their expected useful life or the lease term. Given no renewal option, the amortization period is 20 years, the shorter of the expected useful life or the remaining lease term at the date of completion. The amortizable base is $840,000 even though the building will have a fair value of $420,000 at the end of the lease. The latter amount is not a salvage value because the building will become the lessor’s property when the lease expires. Consequently, Year 2 straight-line amortization is $42,000 ($840,000 ÷ 20 years), and the year-end carrying amount is $798,000 ($840,000 – $42,000).
Supporting activities are the activities of a nongovernmental not-for-profit entity that
A. Are not considered program services.
B. Are the major purpose for, and the major output of, the entity.
C. Ordinarily include management and general and membership-development activities but not fundraising.
D. Result in goods and services being distributed to beneficiaries, customers, or members.
A. Are not considered program services.
To help in assessing service efforts, a statement of activities or the notes should provide information about expenses reported by functional classification, e.g., by major classes of program services and supporting activities. An analysis also must be presented that disaggregates functional expense classifications by natural expense classifications (e.g., salaries, interest, rent, and depreciation). Supporting activities are all activities of an NFP other than program services. They include management and general, fundraising, and membership-development activities.
At December 31, S Corp. owned 80% of J Corp.’s common stock and 90% of C Corp.’s common stock. J’s net income for the year was $200,000 and C’s net income was $400,000. C and J had no interentity ownership or transactions during the year. Combined financial statements are being prepared for C and J in contemplation of their sale to an outside party. In the combined income statement, combined net income should be reported at
A. $520,000
B. $600,000
C. $420,000
D. $560,000
B. $600,000
Combined financial statements are appropriate when common management or common control exists for two or more entities not subject to consolidation. The calculation of combined net income is similar to the calculation for consolidated net income. Thus, combined net income should be recorded at the total of the net income reported by the combined entities, adjusted for any profits or losses from transactions between the combined entities. In the combined income statement issued for J Corp. and C Corp., net income should be reported at $600,000 ($200,000 + $400,000).
Ral Corp. has an incentive compensation plan under which a branch manager receives 10% of the branch’s income after deduction of the bonus but before deduction of income tax. Branch income for the current year before the bonus and income tax was $165,000. The tax rate was 30%. The bonus amounted to
A. $16,500
B. $15,000
C. $11,550
D. $11,907
B. $15,000
The bonus is equal to 10% of the annual pretax income of $165,000 after the bonus has been deducted. Solving the equation given below, the bonus is equal to $15,000.
During Year 4, Jones Foundation, a nongovernmental, not-for-profit entity, received the following support:
- A cash contribution of $875,000 to be used at the board of directors’ discretion
- A promise to contribute $500,000 in Year 5 from a supporter who has made similar contributions in prior periods
- Contributed legal services with a value of $100,000, which Jones would have otherwise purchased
At what amounts should Jones classify and record these transactions?
A. $975,000 $500,000
The promise to contribute is donor-restricted support.
Cash contribution of $875,000 that was received in Year 4 is revenue without donor restrictions.
The contributed legal services at the fair value of $100,000 will be included in revenue without donor restrictions since this is a service requiring special skills that would have been purchased if not donated.
Fact Pattern: On January 1, Jennie Corporation purchased 30% of the common stock of Katlee Company for $500,000. The following information relates to Katlee at the date of acquisition.
Additional information relating to the purchase appears below.
- Jennie has the ability to exercise significant influence over Katlee and did not elect the fair value option.
- Both the carrying amount and the fair value are the same for receivables, land, and liabilities.
- The fair value of the building is $900,000.
- Jennie depreciates its assets on a straight-line basis. Both tangible and intangible assets are amortized over 10 years.
- For the current year, Katlee had net income of $400,000 and declared and paid dividends of $100,000.
The amount of equity method goodwill related to Jennie’s acquisition of Katlee at January 1 was
A. $0
B. $140,000
C. $60,000
D. $200,000
B. $140,000
When an investment in voting rights enables the investor to exercise significant influence over the investee and the fair value option is not elected, the investment should be accounted for under the equity method.
Equity method goodwill is calculated as the difference between the cost of the investment and the underlying equity in the fair value of the investee’s net assets. On the acquisition date, the fair value of Katlee Company’s net assets is $1,200,000 ($50,000 + $250,000 + $900,000 + $100,000 - $100,000). Thus, equity method goodwill is $140,000.
On January 1, Year 2, Neal Co. issued 100,000 shares of its $10 par value common stock in exchange for all of Frey, Inc.’s outstanding stock. The fair value of Neal’s common stock on that date was $19 per share. The carrying amounts and fair values of Frey’s assets and liabilities on January 1, Year 2, were as follows:
What is the amount of goodwill resulting from the business combination?
A. $70,000
B. $0
C. $105,000
D. $175,000
A. $70,000
Goodwill is the excess of (1) the sum of the acquisition-date fair values of (a) the consideration transferred, (b) any noncontrolling interest in the acquiree, and (c) the acquirer’s previously held equity interest in the acquiree over (2) the net of the acquisition-date fair values of the identifiable assets acquired and liabilities assumed. Goodwill of the consolidated entity is therefore calculated as follows:
Hudson Hotel collects 15% in city sales taxes on room rentals, in addition to a $2 per room, per night, occupancy tax. Sales taxes for each month are due at the end of the following month, and occupancy taxes are due 15 days after the end of each calendar quarter. On January 3, Year 5, Hudson paid its November Year 4 sales taxes and its fourth quarter Year 4 occupancy taxes. Additional information pertaining to Hudson’s operations is
What amounts should Hudson report as sales taxes payable and occupancy taxes payable in its December 31, Year 4, balance sheet?
A. $39,000 $8,200
Hudson presumably paid its October sales taxes during Year 4, but it did not pay sales taxes for November and December and occupancy taxes for October, November, and December until Year 5. Consequently, it should accrue a liability for sales taxes in the amount of $39,000 [($110,000 November rentals + $150,000 December rentals) × 15%] and a liability for occupancy taxes in the amount of $8,200 [(1,100 + 1,200 + 1,800) room nights × $2].
Selected financial information for Windham, Inc., for the year just ended is shown below.
The total income tax expense reported on Windham’s income statement for the year just ended should be
A. $960,000
B. $1,760,000
C. $2,640,000
D. $1,360,000
B. $1,760,000
Taxable income consists of pretax income adjusted for those items that give rise to tax differences. Taxable income is therefore $3,400,000 ($5,000,000 – $600,000 – $1,000,000), and current tax expense is $1,360,000 ($3,400,000 × 40%). The interest on municipal bonds is a permanent difference because it is tax-exempt, i.e., it is recognized in GAAP income but never in taxable income. Permanent differences have no deferred tax effects. However, the gain on the sale of land is a temporary difference because it is included in GAAP income this year and is included in taxable income in the future. This temporary difference gives rise to a future taxable amount, specifically, a $400,000 deferred tax liability ($1,000,000 × 40%). This credit to the deferred tax liability account is balanced by a debit to income tax expense. Total income tax expense for the year is therefore $1,760,000 ($1,360,000 current portion + $400,000 deferred portion).
An entity is most likely to account for an asset retirement obligation (ARO) by
A. Decreasing the carrying amount of the related long-lived asset.
B. Decreasing the liability for the ARO to reflect the accretion expense.
C. Recognizing a liability equal to the sum of the net undiscounted future cash flows associated with the ARO.
D. Recognizing the fair value of the liability using an expected present value technique.
D. Recognizing the fair value of the liability using an expected present value technique.
The fair value of the ARO liability is recognized when incurred. If a reasonable estimate of the fair value cannot be made at that time, the ARO will be recognized when such an estimate can be made. An expected present value technique ordinarily should be used to estimate the fair value. A credit-adjusted risk-free rate is the appropriate discount rate.
A company pays more than the fair value to acquire treasury stock. The difference between the price paid to acquire the treasury stock and the fair value should be recorded as
A. Shareholders’ equity.
B. A liability.
C. An expense.
D. An asset.
A. Shareholders’ equity.
Apart from cash paid or received, a firm cannot recognize assets, liabilities, gains, or losses from transactions in its own stock. Treasury stock is reported on the balance sheet as a subtraction from equity.
Dunne Co. sells equipment service contracts that cover a 2-year period. The sales price of each contract is $600. Dunne’s past experience is that, of the total dollars spent for repairs on service contracts, 40% is incurred evenly during the first contract year and 60% evenly during the second contract year. Dunne sold 1,000 contracts evenly throughout the year. In its December 31 balance sheet, what amount should Dunne report as deferred service contract revenue?
A. $360,000
B. $300,000
C. $480,000
D. $540,000
C. $480,000
Revenue should be recognized when (or as) the entity satisfies a performance obligation by transferring a promised good or service to a customer. The good or service is transferred when the customer obtains control of that good or service.
40% of revenue should be recognized in the first year of a service contract. Given that expenses are incurred evenly throughout the year, revenue also will be recognized evenly. Dunne sold 1,000 contracts evenly throughout the year, total revenue will be $600,000 (1,000 contracts × $600), and the average contract must have been sold at mid-year. Thus, the elapsed time of the average contract must be half a year, and revenue recognized for the year must equal $120,000 ($600,000 total revenue × 40% × .5 year). Deferred revenue (a contract liability) at year end will equal $480,000 ($600,000 – $120,000).
Fact Pattern: On January 1, Year 1, Big Co. enters into a contract with a customer to build a bridge on the customer’s land for $2,500,000. The construction of the bridge is expected to be completed at the end of Year 3. Big determines that the progress toward completion of the bridge is reasonably measurable using the input method based on costs incurred. At contract inception, Big estimates that the expected total cost of construction will be $1,700,000. Below are the (1) actual costs incurred during each year, (2) expected costs to complete the construction, and (3) amounts billed to the customer:
What amount of gross profit on this contract is recognized by Big in its Year 3 income statement?
A. $500,000
B. $166,667
C. $50,000
D. $100,000
D. $100,000
The construction was completed in Year 3. Accordingly, the entire gross profit from the contract of $500,000 [$2,500,000 – ($700,000 + $500,000 + $800,000)] must be recognized by the end of Year 3. At the end of Year 2, the total expected gross profit from the contract was $625,000 [$2,500,000 – ($700,000 + $500,000 + $675,000)]. By the end of Year 2, 64% [($700,000 + $500,000) ÷ ($700,000 + $500,000 + $675,000)] of the expected contract costs had been incurred. Because the recognized gross profit in the first 2 years of the contract was $400,000 ($625,000 × 64%), the gross profit recognized in Year 3 is $100,000 ($500,000 – $400,000).
Miro Co. began business on January 2, Year 1. Miro used the double-declining balance method of depreciation for financial statement purposes for its building and the straight-line method for income taxes. On January 16, Year 3, Miro elected to switch to the straight-line method for both financial statement and tax purposes. The building cost $240,000 in Year 1, which has an estimated useful life of 15 years and no salvage value. Information related to the building is as follows:
Miro’s tax rate is 40%.
Which of the following statements is correct?
A. Miro’s deferred tax asset should be reduced by $7,200 in Year 3.
B. Miro’s deferred tax asset should be reduced by $554 in Year 3.
C. Miro’s deferred tax liability should be reduced by $7,200 in Year 3.
D. There should be no reduction in Miro’s deferred tax liabilities or deferred tax assets in Year 3.
B. Miro’s deferred tax asset should be reduced by $554 in Year 3.
After Year 2, the tax basis of the building was $208,000 ($240,000 – $16,000 – $16,000), and its carrying amount was $190,000 ($240,000 – $30,000 – $20,000), a difference of $18,000. The result was a deferred tax asset of $7,200 ($18,000 future deductible amount × 40% tax rate). However, Miro changed to the straight-line depreciation method for tax and financial statements purposes at the beginning of Year 3.
A change in a method of depreciation is accounted for prospectively as a change in estimate because the change in principle is inseparable from the change in estimate. Hence, Miro will recognize $190,000 of depreciation in its financial statements for the remainder of the building’s estimated useful life (13 years, starting in Year 3). During the same period, Miro will deduct $208,000 on its tax return (assuming sufficient taxable income). Miro’s depreciation expense for Year 3 is $14,615 ($190,000 ÷ 13 years). The excess tax deduction (assuming sufficient taxable income) is $1,385 ($16,000 – $14,615), so the reduction in the deferred tax asset is $554 ($1,385 × 40%).
Mint Co.’s cash balance in its balance sheet is $1,300,000, of which $300,000 is identified as a compensating balance. In addition, Mint has classified cash of $250,000 that has been restricted for future expansion plans as “other assets.” Which of the following should Mint disclose in notes to its financial statements?
D. Yes Yes
Cash amounts designated for special uses should be separately presented.
Compensating balances need to be disclosed because the full amount reported in the cash account might not be available to meet general obligations.
On December 31, Poe Corporation exchanged 200,000 shares of its $10 par common stock, with a market price of $18 per share, for all of Saxe Corporation’s common stock. The equity section of each entity’s balance sheet immediately before the combination is presented below:
In the December 31 consolidated balance sheet, additional paid-in capital should be reported at
A. $1,450,000
B. $2,900,000
C. $950,000
D. $1,300,000
B. $2,900,000
A business combination is an acquisition of net assets, and the subsidiary’s equity accounts are eliminated. Thus, the additional paid-in capital of $2,900,000 after acquisition is the acquirer’s before the acquisition plus the additional paid-in capital from the new issuance of stock {$1,300,000 + [200,000 × ($18 – $10)]}.
Which of the following is a method to generate cash from accounts receivable?
C. Yes Yes
Both assignment and factoring generate cash from AR. Assignment occurs when specifically named AR accounts are pledged as collateral for a loan. The AR remains those of the assignor. When cash is collected from these AR accounts, the cash must be remitted to the assignee.
AR’s factored when they are sold outright to a third party. This sale may be with or without recourse.
A retail store sold gift certificates that are redeemable in merchandise. The gift certificates lapse one year after they are issued. How would the deferred revenue account be affected by each of the following?
D. Yes Yes
When the gift certificates are sold, the retail store records deferred revenue (a contract liability). When the certificates are redeemed or lapse, the store reclassifies deferred revenue as revenue because no performance obligation remains to be satisfied. Thus, the redemption and lapse of certificates decrease deferred revenue.
Rose Project is a nongovernmental not-for-profit entity established to help runaway children. Every year, Rose holds a charity benefit at which participants are asked to make pledges. This year, Rose received the following pledges:
The pledges are legally binding and are expected to be received within the next 12 months. Rose estimates that 5% of the pledges will be uncollectible. At what amount should the pledges be reported on Rose’s statement of financial position as pledges receivable?
A. $190,000
B. $700,000
C. $665,000
D. $475,000
C. $665,000
NFPs recognize unconditional promises to give at fair value. The present value of estimated future cash flows is an appropriate measure of fair value. However, unconditional promises to give expected to be collected in less than 1 year may be recognized at net realizable value. Rose Project may therefore report net pledges receivable of $665,000 [($500,000 + $200,000) × (1 – .05)].
On February 1, Hyde Corp., a newly formed company, had the following stock issued and outstanding:
- Common stock, no par, $1 stated value, 10,000 shares originally issued for $15 per share
- Preferred stock, $10 par value, 3,000 shares originally issued for $25 per share
Hyde’s February 1 statement of equity should report
C. $10,000 $30,000 $185,000
The common stock was issued for a total of $150,000 (10,000 shares × $15). Of this amount, $10,000 (10,000 shares × $1 stated value) should be allocated to the common stock, with the remaining $140,000 ($150,000 – $10,000) credited to additional paid-in capital. The preferred stock was issued for $75,000 (3,000 shares × $25), of which $30,000 (3,000 shares × $10 par value) should be allocated to the preferred stock and $45,000 ($75,000 – $30,000) should be allocated to additional paid-in capital. In the statement of equity, Hyde therefore should report $10,000 in the common stock account, $30,000 in the preferred stock account, and $185,000 ($140,000 + $45,000) as additional paid-in capital.
Paper Co. had net income of $70,000 during the year. Dividend payment was $10,000. The following information is available:
What amount should Paper report as net cash provided by operating activities in its statement of cash flows for the year?
A. $20,000
B. $0
C. $10,000
D. $30,000
B. $0
The payment of dividends, the repayment of debt (the mortgage), and the issuance of debt (the bonds) are financing activities. The purchase of debt or equity instruments the (available-for-sale securities) is an investing activity. These are excluded from operating cash and do not affect net income.
The conversion of cost of goods sold to cash paid to suppliers requires subtracting the inventory increase and the accounts payable decrease. The net cash provided by operating activities is therefore $0 ($70,000 net income – $40,000 inventory increase – $30,000 accounts payable decrease).
