Roger

Question 1

On December 31, 20X2, Paxton Co. had a note payable due on August 1, 20X3. On January 20, 20X3, Paxton signed a financing agreement to borrow the balance of the note payable from a lending institution to refinance the note. The agreement does not expire within one year, and no violation of any provision in the financing agreement exists. On February 1, 20X3, Paxton was informed by its financial advisor that the lender is not expected to be financially capable of honoring the agreement. Paxton’s financial statements were issued on March 31, 20X3. How should Paxton classify the note on its balance sheet at December 31, 20X2?

A.
As a current liability because the financing agreement was signed after the balance sheet date.

B.
As a current liability because the lender is not expected to be financially capable of honoring the agreement.

C.
As a long-term liability because the agreement does not expire within one year.

D.
As a long-term liability because no violation of any provision in the financing agreement exists.

Answer 1

B.
As a current liability because the lender is not expected to be financially capable of honoring the agreement.

In this case, there is intent but not ability because the lender is not expected to be financially capable of honoring the agreement to refinance the short-term liability on a long-term basis. The note payable must be classified as a current liability.

Question 2

In open market transactions, Gold Corp. simultaneously sold its long-term investment in Iron Corp. bonds and purchased its own outstanding bonds. The broker remitted the net cash from the two transactions. Gold’s gain on the purchase of its own bonds exceeded its loss on the sale of the Iron bonds. Gold should report the

A.
The effects of the two transactions in Other Comprehensive Income (OCI).

B.
The effects of the two transactions in income from continuing operations.

C.
Effect of its own bond transaction gain in income from continuing operations, and report the Iron bond transaction as a loss in income from discontinued operations.

D.
Effect of its own bond transaction as a gain from discontinued operations, and report the Iron bond transaction loss in income from continuing operations.

Answer 2

B
Despite the fact that the broker remitted the net amount to Gold, the two transactions will be reported separately. The gain on the retirement of Gold’s bonds is reported as a component of income from continuing operations. The loss on the sale of Iron’s bonds is also a component of income from continuing operations but, if material, would be reported separately.

Question 3

Canterbury Co. issues a discounted, non-interest-bearing note in exchange for borrowed funds. Choose whether the cash received will be higher or lower than the face value of the note, and whether the effective annual interest rate will be higher or lower than the discount rate:

Cash Received vs. Face Value of Note Effective Rate vs. Discount Rate

A.Higher Lower

B.Lower Higher

C.Higher Higher

D.Lower Lower

Answer 3

B
When a note is discounted, the issuer will receive the maturity value, which will be the face amount when the note is noninterest bearing, reduced by the discount. As a result, cash received will be lower than the face value of the note. The amount of the discount will be the discount rate multiplied by the maturity value and adjusted for the length of time until the note matures. Upon repayment, the effective rate paid will be higher than the discount rate. A $1,000 noninterest bearing note, for example, maturing in one year that is discounted at 10% will result in cash received of $1,000 - $100 or $900. At maturity, the borrower remits the $1,000 to the lender, which is repayment of the $900 received plus the $100 discount. A cost of $100 to borrow $900 for one year would indicate an effective rate in excess of 11%, higher than the 10% discount rate.

Question 4

When purchasing a bond, the present value of the bond’s expected net future cash inflows discounted at the market rate of interest provides what information about the bond?
A.
Price

B.
Par.

C.
Yield.

D.
Interest.

Answer 4

A.

Price

Question 5

On March 1, 20X7, Somar Co. issued 20-year bonds at a discount. By September 1, 20X12, the bonds were quoted at 106 when Somar exercised its right to retire the bonds at 105. How should Somar report the bond retirement on its 20X12 income statement?

A.
A gain in continuing operations.

B.
A loss in continuing operations.

C.
A gain in discontinued operations.

D.
A loss in discontinued operations

Answer 5

Choice B (Correct) : Since the bonds were issued at a discount, the carrying value would be lower than the face amount. If they are retired at 105, the amount paid to redeem the bonds would exceed the face, and therefor the carrying value, resulting in a loss on retirement. A gain or loss on early retirement of debt is recognized as a component of income from continuing operations.

Question 6

When it is considered imminent that a company is no longer a going concern and the company needs to liquidate its assets, under the Liquidation Basis of Accounting, the assets should be valued at?

A.
Original cost

B.
Net realizable value (NRV)

C.
Amount expected to be generated upon liquidation

D.
Fair market value at date liquidation is considered imminent

Answer 6

Choice C (Correct) : Per ASC 205, the liquidation basis of accounting, when an entity is no longer a going concern and liquidation is considered to be imminent, the assets are valued at the amount expected to be generated upon liquidation. Liabilities are valued according to U.S. GAAP and costs expected to be incurred during liquidation should be accrued.

Question 7

An issuer of bonds uses a sinking fund for the retirement of the bonds. Cash was transferred to the sinking fund and subsequently used to purchase investments. The sinking fund

I. Increases by revenue earned on the investments.

II. Is not affected by revenue earned on the investments.

III. Decreases when the investments are purchased.

A.
I only.

B.
I and III.

C.
II and III.

D.
III only

Answer 7

Choice A (Correct) and Choices B, C, D (Incorrect): When cash is transferred to a sinking fund, it is a transfer from a current asset to a noncurrent asset. When investments are purchased, the amount in the sinking fund remains unchanged, only the composition of the fund has changed. As revenues are earned on the investments, the earnings are reported as income and added to the sinking fund.

Question 8

When debt is issued at a premium, interest expense over the term of debt equals the cash interest paid?
A.
Minus premium

B.
Minus premium minus par value

C.
Plus premium

D.
Plus premium plus par value

Answer 8

A

JE:
Int exp 20
Premium amort 10
cash 30

Question 9

Bonds with detachable stock warrants were issued by Flack Co. Immediately after issue the aggregate market value of the bonds and the warrants exceeds the proceeds. Is the portion of the proceeds allocated to the warrants less than their market value, and is that amount recorded as contributed capital?

I. Less than warrants’ market value

II. Contributed capital

A.
I only.

B.
II only.

C.
Both I and II.

D.
Neither I nor II

Answer 9

Choice C (Correct) and Choices A, B, D (Incorrect): When bonds are issued with detachable stock purchase warrants, the proceeds are allocated between the bonds and the warrants with the amount allocated to the warrants recorded as a form of additional paid-in capital. The proceeds are allocated using the relative fair market values of the bonds and the warrants. Since the aggregate market value of those securities exceeds the proceeds, the amount allocated to each security would be lower than its market value.

Question 10

Which of the following statements characterizes convertible debt?

A.
The holder of the debt must be repaid with shares of the issuer’s stock

B.
No value is assigned to the conversion feature when convertible debt is issued.

C.
The transaction should be recorded as the issuance of stock.

D.
The issuer’s stock price is less than market value when the debt is converted.

Answer 10

Choice B (Correct): No value is assigned to the conversion feature when convertible debt is issued.

Question 11

When the effective interest method of amortization is used for bonds issued at a premium, the amount of interest payable for an interest period is calculated by multiplying the

A.
Face value of the bonds at the beginning of the period by the contractual interest rate.

B.
Face value of the bonds at the beginning of the period by the effective interest rates.

C.
Carrying value of the bonds at the beginning of the period by the contractual interest rate.

D.
Carrying value of the bonds at the beginning of the period by the effective interest rates

Answer 11

A.
Face value of the bonds at the beginning of the period by the contractual interest rate

Things to remember:
Interest payable is a legal commitment and is always based on the stated (ie, contractual) rate of the bond.. Interest payable is the amount of the interest payment for a period that has not yet been paid. Interest expense correlates with a bond’s carrying value and is based on the effective interest rate.

Question 12

On December 31, 20X1, Northpark Co. collected a receivable due from a major customer. Which of the following ratios would be increased by this transaction?

A.
Inventory turnover ratio.

B.
Receivable turnover ratio.

C.
Current ratio.

D.
Quick ratio

Answer 12

B
The collection would reduce accounts receivable and, therefore, average accounts receivable. Since the receivable turnover ratio is credit sales divided by average accounts receivable, a decrease in average accounts receivable will increase the ratio.

Question 13

How are dividends per share for common stock used in the calculation of the following?

Dividend per share payout ratio Earnings per share

A.
Numerator Numerator

B.
Numerator Not used

C.
Denominator Not used

D.
Denominator Denominator

Answer 13

Choice B (Correct): The dividend per share payout ratio is the ratio of dividends per share to earnings per share, making dividends per share the numerator. Earnings per share, on the other hand, is net income attributable to common stockholders divided by weighted average shares. Dividends have no effect.

Question 14

In a period of rising general price levels, Pollard Corp. discloses income on a current cost basis. Which of the following contributes to Pollard’s purchasing power loss on net monetary items?

A.
Refundable deposits with suppliers.

B.
Equity investment in unconsolidated subsidiaries.

C.
Warranty obligations.

D.
Wages payable

Answer 14

Choice A (Correct): During a period of rising prices, a purchasing power loss is incurred on monetary assets such as refundable deposits with suppliers. Neither equity investments nor warranty obligations are monetary, so neither will result in a purchasing power gain or loss. Wages payable is a monetary liability and will result in a purchasing power gain during periods of inflation.

Question 15

Heath Co.’s current ratio is 4:1. Which of the following transactions would normally increase its current ratio?

A.
Purchasing inventory on account.

B.
Selling inventory on account.

C.
Collecting an account receivable.

D.
Purchasing machinery for cash

Answer 15

Choice B (Correct) and Choices A, C, D (Incorrect):The selling of inventory on account will increase accounts receivable for the sales price while reducing inventory for the cost. Assuming the sales price is higher than the cost of the inventory, current assets would increase as would the current ratio.

Question 16

Mint Co.’s cash balance in its balance sheet is $1,300,000, of which $300,000 is identified as a compensating balance. Additionally, 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?

A.
Both compensating balance and restricted cash.

B.
Compensating balance, not restricted cash.

C.
Restricted cash, not compensating balance.

D.
Neither compensating balance nor restricted cash

Answer 16

Choice A (Correct) and Choices B, C, D (Incorrect): FASB 210-10-S99 states: “Separate disclosure shall be made of the cash and cash items which are restricted as to withdrawal or usage.” T Restricted cash should be disclosed, as well as the compensating balances restricted deposit required by the bank.

Question 17

Are the following ratios useful in assessing the liquidity position of a company?

Defensive-interval ratio Return on stockholders’ equity

A.
Yes Yes

B.
Yes No

C.
No Yes

D.
No No

Answer 17

Choice B (Correct): The defensive interval ratio, which measures the length of time a company can continue to pay its bills using only its liquid current assets, assesses liquidity. The return on stockholders’ equity measures profitability, not liquidity.

Question 18

Zeta Co. reported credit sales revenue of $4,600,000 in its income statement for the year ended December 31, Year 2. Additional information is as follows:

12/31/Year 1 12/31/Year 2
Accounts receivable $1,000,000 $1,300,000
Allowance for credit losses (60,000) (110,000)
Zeta wrote off uncollectible accounts totaling $20,000 during Year 2. Under the cash basis of accounting, Zeta would have reported Year 2 sales of

A.
$4,280,000

B.
$4,300,000

C.
$4,350,000

D.
$4,900,000

Answer 18

A
Beginning accounts receivable Year 2 $1,000,000
Credit sales for Year 2 4,600,000
Less accounts written off (20,000)
Less collections in Year 2 (plug) (4,280,000)
Ending accounts receivable Year 2 $1,300,000

Question 19

Which of the following is true regarding the comparison of managerial to financial accounting?

A.
Managerial accounting is generally more precise.

B.
Managerial accounting has a past focus and financial accounting has a future focus.

C.
The emphasis on managerial accounting is relevance and the emphasis on financial accounting is timeliness.

D.
Managerial accounting need not follow generally accepted accounting principles (GAAP) while financial accounting must follow them.

Answer 19

D.
Managerial accounting need not follow generally accepted accounting principles (GAAP) while financial accounting must follow them

Question 20

The following are held by Smite Co.

Cash in checking account $20,000
Cash in bond sinking fund account 30,000
Postdated check from customer dated one month from balance sheet date 250
Petty cash 200
Commercial paper (matures in two months) 7,000
Certificate of deposit (matures in six months) 5,000
What amount should be reported as cash and cash equivalents on Smite’s balance sheet?

A.
$27,200

B.
$27,450

C.
$32,200

D.
$57,200

Answer 20

A
In this scenario, the checking account balance, petty cash, and commercial paper maturing in two months are all cash or cash equivalents.

Checking account $20,000
Petty cash 200
Commercial paper 7,000
Cash and cash equivalents $27,200

NOTE:postdated check is treated as a receivable. Postdated checks are not liquid, so they are not cash.

Question 21

During 20X5, Beck Co. purchased equipment for cash of $47,000, and sold equipment with a $10,000 carrying value for a gain of $5,000. How should these transactions be reported in Beck’s 20X5 statement of cash flows?

A.
Cash outflow of $32,000.

B.
Cash outflow of $42,000.

C.
Cash inflow of $5,000 and cash outflow of $47,000.

D.
Cash inflow of $15,000 and cash outflow of $47,000

Answer 21

D
Don’t net Op. and Investing!

Op JE:
Cash.       15
Acc dep. 10
    Equipment 20
    Gain.            5

Question 22

What is the appropriate characterization of the net assets of a nongovernmental not-for-profit organization?

A.
Residual interest

B.
Ownership interest

C.
Donor’s interest

D.
Equity interest

Answer 22

Choice A (Correct): Residual interest is the appropriate characterization of the net assets of a nongovernmental not-for-profit organization. As per Statement of Financial Accounting Concepts No. 6 (SFAC 6), equity or net assets is the residual interest in the assets of an entity that remains after deducting its liabilities. With business enterprises this residual interest is often referred to as owners’ equity, but a not-for-profit organization has no ownership interest in the same sense as a business enterprise.

Question 23

Park, Inc. acquired 100% of Gravel Co.’s net assets. On the acquisition date, Gravel’s accounting records reflected $50,000 of costs associated with in-process research and development activities. The fair value of the in-process research and development activities was $400,000. Park’s consolidated intangible assets will increase by what amount, if any, as a result of the acquisition of the in-process research and development activities?

A.
$0

B.
$50,000

C.
$350,000

D.
$400,000

Answer 23

Choice D (Correct): ASC 730-10-15-4 requires R&D assets acquired in a business combination to be measured and recognized at their fair values at the date of acquisition.

Question 24

Balm Co. had 100,000 shares of common stock outstanding as of January 1. The following events occurred during the year:

4/1 Issued 30,000 shares of common stock.
6/1 Issued 36,000 shares of common stock.
7/1 Declared a 5% stock dividend.
9/1 Purchased as treasury stock 35,000 shares of its common stock.
Balm used the cost method to account for the treasury stock.
What is Balm’s weighted average of common stock outstanding at December 31?

A.
131,000

B.
139,008

C.
150,675

D.
162,342

Answer 24

B

100,000
22,500 (30,000 x 9/12)
21,000 (36,000 x 7/12)
7,175 (NOTE: 5% X TOTAL ADDITION ABOVE 143,500)
(11.667) NOTE: MINUS TOTAL MO. LEFT 35000 X 4/12
=139,008

Question 25

The market price of a bond issued at a discount is the present value of its principal amount at the market (effective) rate of interest A. Less the present value of all future interest payments at the market (effective) rate of interest. B. Less the present value of all future interest payments at the rate of interest stated on the bond. C. Plus the present value of all future interest payments at the market (effective) rate of interest. D. Plus the present value of all future interest payments at the rate of interest stated on the bond

Answer 25

Choice C (Correct) and Choices A, D (Incorrect): The market price of a bond is equal to the present value of the stream of payments to be made using the market rate of interest. The stream of payments will include the principal amount, representing a lump sum to be paid at the end of the bond term, and periodic interest, representing an annuity of equal payments to be paid each period during the term of the bond. As a result, the market value of the bond will be the present value of the principal plus the present value of future interest payments, both calculated using the market rate of interest.

Question 26

Which of the following is a research and development cost? A. Development or improvement of techniques and processes. B. Offshore oil exploration that is the primary activity of a company. C. Research and development performed under contract for others. D. Market research related to a major product for the company.

Answer 26

Choice A (Correct): Research is aimed at the discovery of new knowledge that will result in a new product or process or significant improvement to existing product or process. Development is the conversion of that new knowledge into a plan or design for a new product or process. Costs should not be treated as R&D and are accounted for separately when they are directly related to current revenue such as research performed for others for a fee, periodic design changes or quality control testing to existing products, costs for setting up production of a commercially viable product. Costs incurred for the development or improvement of techniques and processes are R&D costs and are expensed as such.

Question 27

A city ordered goods at an estimated cost of $4,500. When the goods were received, 30 days after the order was placed, they were accompanied by an appropriate invoice in the amount of $4,800. What amount will be recognized as an adjustment to encumbrances when the goods are delivered? A. Debit $4,500 B. Credit $4,500 C. Debit $4,800 D. Credit $4,800

Answer 27

Choice B (Correct) and Choices A, C, D (Incorrect): When the goods were ordered, encumbrances would have been debited for the estimated amount of $4,500. When the goods were delivered, the encumbrance would be reversed with a credit to encumbrances of $4,500. The actual cost of $4,800 would be recognized with a debit to expenditures.

Question 28

Jan Corp. amended its defined benefit pension plan, granting a total credit of $100,000 to four employees for services rendered prior to the plan’s adoption. The employees, A, B, C, and D, are expected to retire from the company as follows: “A” will retire after three years. “B” and “C” will retire after five years. “D” will retire after seven years. What is the amount of prior service cost amortization in the first year? A. $0 B. $5,000 C. $20,000 D. $25,000

Answer 28

Choice C (Correct) and Choices B, D (Incorrect): The prior service cost of $100,000 will be amortized over the average remaining service lives of the covered employees. Since one employee will retire after 3 years, 2 after 5 years, and one after 7 years, the average remaining service life for the 4 employees is 5 years ((3+5+5+7) / 4 = 5). Amortization will be $100,000/5 or $20,000. Choice A (Incorrect): Amortization of prior service cost must be handled on a current and prospective basis.

Question 29

Which of the following statements are required to be presented for special-purpose government entities engaged only in business-type activities (such as utilities)? A. Statement of net assets only. B. Management's Discussion and Analysis (MD&A) and Required Supplementary Information (RSI) only. C. The financial statements required for governmental funds, including MD&A. D. The financial statements required for enterprise funds, including MD&A and RSI

Answer 29

Choice D (Correct) and Choices A, B, C (Incorrect): Because a special-purpose government entity engaged only in business-type activities is by definition an enterprise fund, it would need to present the financial statements required for enterprise funds, including MD&A and RSI.

Question 30

Due to a decline in market price in the second quarter, Petal Co. incurred an inventory loss. The market price is expected to return to previous levels by the end of the year. At the end of the year the decline had not reversed. When should the loss be reported in Petal's interim income statements? A. Ratably over the second, third, and forth quarters. B. Ratably over the third and fourth quarters. C. In the second quarter only. D. In the fourth quarter only.

Answer 30

Choice D (Correct): An inventory loss that is expected to be recovered over the course of the same fiscal year is not recognized in the interim period in which it occurs. It is instead deferred and offset against the subsequent recovery. If the loss is not recovered as of the end of the annual period, however, it is recognized in the earliest interim period in which it is determined that it will not be recovered. In this case, since the loss had not been recovered as of the end of the year, it would be reported in the fourth quarter.

Question 31

At December 30, year 3, Vida Co. had cash of $200,000, a current ratio of 1.5:1 and a quick ratio of 0.5:1. On December 31, year 3, all cash was used to reduce accounts payable. How did these cash payments affect the ratios? A. Increased current ratio, decreased quick ratio. B. Increased current ratio, no effect on quick ratio. C. Decreased current ratio, increased quick ratio. D. Decreased current ratio, no effect on quick ratio

Answer 31

Choice A (Correct) and Choices B, C, D (Incorrect): An increase in a current ratio of 1.5:1 would require an increase in current assets that was greater than 150% of the increase in current liabilities, or a decrease in current liabilities that was at least 2/3 of a decrease in current assets. A cash payment of accounts payable reduces a current asset and a current liability by the same amount, increasing the current ratio. An increase in a quick ratio of 0.5:1 would require an increase in quick assets that was greater than 50% of the increase in current liabilities or a decrease in current liabilities that was at least twice the decrease in quick assets. A cash payment of accounts payable decreased quick assets and current liabilities by the same amount, decreasing the quick ratio.

Question 32

A shoe retailer allows customers to return shoes within 90 days of purchase. The company estimates that 5% of sales will be returned within the 90-day period. During the month, the company has sales of $200,000 and returns of sales made in prior months of $5,000. What amount should the company record as net sales revenue for new sales made during the month? A. $185,000 B. $190,000 C. $195,000 D. $200,000

Answer 32

B Things to remember: Sales returns is a contra revenue account that is recorded when goods are sold. Allowance for sales returns is a contra accounts receivable account that reduces the related receivables of those returns. Current sales revenue is adjusted only for estimated returns of current sales rather than actual returns relating to prior periods.

Question 33

On December 1, 20X1, two companies entered into a 90-day forward exchange contract for speculative purposes in which A will buy £180,000 from B at the 90-day forward rate of $1.65/£1. On December 31, 20X1, the spot rate was $1.70 and the 60-day forward rate was $1.80. In their December 31, 20X1 financial statements: A. Company A will report an asset and a gain of $27,000 and Company B will report a liability and a loss of $27,000. B. Company A will report an asset and a gain of $9,000 and Company B will report a liability and a loss of $9,000. C. Company B will report a liability and a loss of $27,000, but Company A will not recognize a gain until it is realized when the contract is settled. D. Company B will report a liability and a loss of $9,000, but Company A will not recognize a gain until it is realized when the contract is settled.

Answer 33

Choice A (Correct): A forward exchange contract is a derivative and is reported at fair value on every balance sheet date and unrealized gains and losses are recognized in the period of the change in the exchange rate. As of December 31, 20X1, A is obligated to buy, and Company B is obligated to sell, £180,000 at the end of 60 days for $297,000 (£180,000 x $1.65), when they are expected to be worth $324,000 (£180,000 x $1.80), the 60-day forward rate. As a result, A will recognize and asset and a gain for the difference of $27,000 and B will recognize a liability and loss for the same amount.

Question 34

Which of the following companies would meet the definition of a smaller reporting company with respect to public equity float and annual revenue as established by the U.S. Securities and Exchange Commission? Public equity float Annual revenue A. $225 million $175 million B. $275 million $125 million C. $725 million $50 million D. $775 million $5 million

Answer 34

A The SRC filing category depends on annual revenue and/or the market value of the entity's outstanding equity available to investors for trading, commonly referred to as public equity float. A company with less than $250 million in public equity float is considered an SRC.

Question 35

Brandon County's general fund had the following transactions during the year: Transfer to a debt service fund $100,000 Payment to a pension trust fund $500,000 Purchase of equipment $300,000 What amount should Brandon County report for the general fund as other financing uses in its governmental funds statement of revenues, expenditures, and changes in fund balances? A. $100,000 B. $400,000 C. $800,000 D. $900,000

Answer 35

Choice A (Correct) and Choices B, C, D (Incorrect): A transfer to a debt service fund is an operating transfer because it is a movement of resources from one fund to another in order to finance the current period activities of the recipient fund. Such transfers are reported as Other Financing Sources (Uses) in the governmental fund statement of revenues, expenditures, and changes in fund balances. The purchase of equipment and the payment to a pension trust fund are external and quasi-external transactions, respectively; because payment was made for provided goods or services; therefore, they would be reported as expenditures, not Other Financing Sources (Uses).

Question 36

A company recently moved to a new building. The old building is being actively marketed for sale, and the company expects to complete the sale in four months. Each of the following statements is correct regarding the old building, except: A. It will be reclassified as an asset held for sale. B. It will be classified as a current asset. C. It will no longer be depreciated. D. It will be valued at historical cost

Answer 36

Choice D (Correct) and Choices A, B, C (Incorrect): When a fixed asset is held for sale it will be reclassified on the balance sheet as held for sale. Since it is expected to be sold in four months, it will be reported as a current asset. No depreciation is recognized on assets held for sale. Instead, they are written down to net realizable value, which is the amount for which they are expected to be sold, net of costs of disposal.

Question 37

On January 1, Year 1, Polk Corp. and Strass Corp. had condensed balance sheets as follows: Polk Strass Current assets $70,000 $20,000 Noncurrent assets 90,000 40,000 Total assets $160,000 $60,000 Current liabilities $30,000 $10,000 Long-term debt 50,000 - Stockholders equity 80,000 50,000 Total liab & SE $160,000 $60,000 On January 2, Year 1, Polk borrowed $60,000 and used the proceeds to purchase 90% of the outstanding common shares of Strass. This debt is payable in ten equal annual principal payments, plus interest, beginning December 30, Year 1. The excess cost of the investment over Strass' book value of acquired net assets should be allocated 60% to inventory and 40% to goodwill. On January 2, Year 1, the fair value of Strass shares held by noncontrolling parties was $10,000. On Polk's January 2, Year 1 consolidated balance sheet, noncurrent assets should be A. $130,000 B. $136,000 C. $138,000 D. $140,000

Answer 37

C. $138,000 Purch price 60,000 +Noncontrol Int 10,000 -FV net ident asset (50,000) =Goodwill 20,000 allocated 60% inventory, 40% goodwill ($8,000) non current asset = 90,000+40,000+8,000=138,000

Question 38

The following selection financial data pertains to Callow Corporation for the current year ended December 31: Operating Income $ 900,000 Interest Expense (100,000) Income before income tax 800,000 Income tax expense (320,000) Net Income 480,000 Preferred stock dividends (200,000) Net Income available to common stockholders $ 280,000 The times interest earned ratio is A. 2.8 to 1 B. 4.8 to 1 C. 8.0 to 1 D. 9.0 to 1

Answer 38

Choice D (Correct): The times interest earned ratio measures the ratio of the entity’s income that would be available to pay interest to the actual amount of interest incurred. It is measured as income before interest and taxes, which would be $900,000, divided by the amount of interest, $100,000 in this case, providing a ratio of 9.0 to 1.

Question 39

The purpose of a statement of financial position for a nongovernmental not-for-profit entity is to provide relevant information about A. The cash receipts and cash payments during a period in time. B. The effects of transactions and other events and circumstances that change the amount and nature of net assets. C. The assets, liabilities, and net assets, and about their relationships to one another at a moment in time. D. The changes in net assets with donor restrictions and net assets without donor restrictions for a period of time

Answer 39

Choice C (Correct): The statement of financial position for a nongovernmental not-for-profit entity is similar to the balance sheet for a for-profit entity. As such it provides relevant information about an entity’s assets, liabilities, and net assets, as well as their relationships to one another, as of a particular date in time.

Question 40

Yola Corp., a diversified company, is required to report the operating profit or loss for each of its industry segments. For the year ended December 31, 20X0, segment Wy's sales to segment Zee were $100,000. Segment Wy's share of Yola's allocated general corporate expenses was $20,000. In the computation of Wy's 20X0 operating profit or loss, the amount of the aforementioned items to be included is A. $120,000 B. $100,000 C. $80,000 D. $20,000

Answer 40

Choice B (Correct) and Choices A, C, D (Incorrect): Separate reporting of a segment's operating profit or loss will be based on that segment's sales, including sales to unaffiliated customers and intersegment sales, which will be reduced by operating expenses that are traceable to that segment and an allocation of indirect operating expenses. NOTE: General corporate expenses are not considered. As a result, Wy's operating profit or loss will include the $100,000 of sales to segment Zee but will not include the general corporate expenses of $20,000.

Question 41

X Company develops software for sale to other entities. Costs incurred in the current year in relation to its most recent software consist of: Design of program $60,000 Initial coding $230,000 Testing program prior to achieving technological feasibility $35,000 Additional coding and testing after achieving technological feasibility $50,000 Cost of producing masters after achieving technological feasibility $310,000 Production of software to be sold $650,000 Printing of instructions and support documentation to be included with software $40,000 How will the above costs be accounted for? A. $325,000 will be reported as research and development expense. B. $1,000,000 will be allocated between the remaining software inventory and cost of goods sold C. $50,000 will be capitalized and amortized as software is sold D. $685,000 will be reported as research and development expense

Answer 41

Choice A (Correct) and Choices B, C, D (Incorrect): Costs incurred prior to achieving technological feasibility, including design of $60,000, coding of $230,000, and testing of $35,000, or $325,000 in total, will be recognized as research and development expense. Design of program-research and development expense $60,000 Initial coding-research and development expense $230,000 Testing program prior to achieving technological feasibility-research and development expense $35,000 Additional coding and testing after achieving technological feasibility-capitalized and amortized $50,000 Cost of producing masters after achieving technological feasibility-capitalized and amortized $310,000 Production of software to be sold-inventory costs and will be allocated between ending inventory and cost of goods sold $650,000 Printing of instructions and support documentation to be included with software-inventory costs and will be allocated between ending inventory and cost of goods sold $40,000

Question 42

At year end, Rim Co. held several debt investments with the intent of selling them in the near term. The investments consisted of $100,000, 8%, five-year bonds, purchased for $92,000, and other debt securities purchased for $35,000. At year end, the bonds were selling on the open market for $105,000 and the other debt securities had a market value of $50,000. All changes in value for the year are considered noncredit related and temporary. What amount should Rim report as trading securities in its year-end balance sheet? A. $50,000 B. $127,000 C. $142,000 D. $155,000

Answer 42

Choice D (Correct) and Choices A, B, and C (Incorrect): Trading debt securities are investments, such as bonds, which the investor has acquired in an attempt to make a profit by buying and selling within a short period of time. These are classified as current assets and initially recorded at cost. However, they are carried at fair value on the balance sheet. Therefore, the value of the trading securities is adjusted to the current market value every accounting period. Due to the marketable nature of these securities, temporary unrealized gains and losses resulting from fluctuations in market price are reported in net income. In addition, any realized gain or loss (permanent) from the sale of these securities is also reported in net income. Rim will report the trading securities at fair value of $155,000 ($105,000 + $50,000).

Question 43

State Co. recognizes construction revenue and expenses from long-term contracts over the time period its construction obligation is being satisfied. During Year 9, a single long-term project was begun, which continued through Year 10. Information on the project follows: Year 9 Year 10 AR from construction $100,000 $300,000 Construction in progress $122,000 $364,000 Partial billings on contract $100,000 $420,000 Construction exp period $105,000 $192,000 Profit recognized from the long-term construction contract in Year 10 should be A. $17,000 B. $50,000 C. $64,000 D. $67,000

Answer 43

Choice A (Correct) and Choices B, C, D (Incorrect): When recognizing revenues while a performance obligation under a long-term contract is being satisfied, costs are charged against income in proportion to the revenues being recognized. In Year 9, the profit recognized is the difference between construction in progress of $122,000 and expenses of $105,000 or $17,000. With total costs of $297,000 ($105,000 + $192,000) and construction in progress of $364,000 at 12/31/Y10, total profit recognized to date is the difference of $67,000. The profit allocated and recognized in Year 10 therefore is $50,000, which is the difference between $67,000 and the profit recognized in Year 9, or $17,000.

Question 44

State Co. recognizes construction revenue and expenses from long-term contracts over the time period its construction obligation is being satisfied. During Year 9, a single long-term project was begun, which continued through Year 10. Information on the project follows: Year 9 Year 10 AR from construction $100,000 $300,000 Construction in progress $122,000 $364,000 Partial billings on contract $100,000 $420,000 Construction exp period $105,000 $192,000 Profit recognized from the long-term construction contract in Year 10 should be A. $17,000 B. $50,000 C. $64,000 D. $67,000

Answer 44

Choice B (Correct): When recognizing revenues while a performance obligation under a long-term contract is being satisfied, costs are charged against income in proportion to the revenues being recognized. CIP= cost incurred to date + profit recog to date In Year 9, the profit recognized is the difference between construction in progress of $122,000 and expenses of $105,000 or $17,000. With total costs of $297,000 ($105,000 + $192,000) and construction in progress of $364,000 at 12/31/Y10, total profit recognized to date is the difference of $67,000. The profit allocated and recognized in Year 10 therefore is $50,000, which is the difference between $67,000 and the profit recognized in Year 9, or $17,000.

Question 45

A corporation issuing stock should charge retained earnings for the market value of the shares issued in a (an) A. Employee stock bonus. (26%) B. Business combination. (12%) C. 10% stock dividend. (55%) D. 2-for-1 stock split. (6%)

Answer 45

Choice C (Correct): A stock dividend is recorded with a debit to retained earnings for the fair value of the shares issued, a credit to common stock for the par or stated value, and a credit to additional paid-in capital for the excess.

Question 46

Envoy Co. manufactures and sells household products. Envoy experienced losses associated with its small appliance group. Operations and cash flows for this group can be clearly distinguished from the rest of Envoy's operations. Envoy plans to sell the small appliance group with its operations. What is the earliest point at which Envoy should report the small appliance group as a discontinued operation? A. When Envoy classifies it as held for sale. B. When Envoy receives an offer for the segment. C. When Envoy first sells any of the assets of the segment. D. When Envoy sells the majority of the assets of the segment

Answer 46

A. When Envoy classifies it as held for sale. Things to remember: A discontinued operation is reported when an entity plans to sell/dispose of a component (and the held for sale criteria are met) or when a component is sold/disposed of during the reporting period. If both situations occur, the earliest point the component would be reported as a discontinued operation is when it is held for sale.

Question 47

On January 2, 20X2, Nori Mining Co. (lessee) entered into a 5-year lease for drilling equipment. Nori accounted for the acquisition as a finance lease for $240,000, which includes a $10,000 purchase option. At the end of the lease, Nori expects to exercise the purchase option. Nori estimates that the equipment's fair value will be $20,000 at the end of its 8-year life. Nori regularly uses straight-line depreciation on similar equipment. For the year ended December 31, 20X2, what amount should Nori recognize as amortization expense on the leased asset? A. $48,000 (15%) B. $46,000 (9%) C. $30,000 (28%) D. $27,500 (46%)

Answer 47

Choice D (Correct) and Choices B, C (Incorrect): Since the lease contains a purchase option which Nori expects to exercise, the equipment will be amortized over its useful life of 8 years. The amount to amortize will be the capitalized amount of $240,000 minus the salvage value of $20,000 for a amortizable basis of $220,000. Amortization in 20X2 will be $220,000/8 years or $27,500. NOTE: the salvage value is fair value not purchase option amount

Question 48

On January 1, Year 2, Gee, Inc. had 90,000 shares of $1 par common stock outstanding and $800,000 of additional paid-in capital. Retained earnings had a balance of $175,000. Gee declared two stock dividends during the year: a 100% stock dividend and a 5% stock dividend. The fair value of the stock on the date of declaration was $3 for both dividends. How would the 100% stock dividend affect the additional paid-in capital and retained earnings amounts reported in Gee's Year 2 statement of stockholders' equity? Additional paid-in capital Retained earnings A. Increase Increase B. Increase Decrease C. No change Increase D. No change Decrease

Answer 48

D Things to remember: Small stock dividends (ie, less than 20-25% of the outstanding shares) are recorded at fair value on the date of declaration. Large stock dividends (ie, greater than 20-25%) are recorded at par value. Although both types of dividends decrease retained earnings, a large stock dividend has no effect on additional paid-in capital since large dividends are recorded at par value. Note: The 5% stock dividend would decrease retained earnings by the total amount of the dividend and increase common stock (by par value) and additional paid-in capital (by the excess fair value over par).

Question 49

What is the primary objective of financial reporting? A. To provide economic information that is comprehensible to all users. B. To provide management with an accurate evaluation of its financial performance. C. To provide forecasts for future cash flows and financial performance. D. To provide information that is useful for economic decision making.

Answer 49

D. | To provide information that is useful for economic decision making

Question 50

A company has an equity investment with a historical cost of $500,000 that is traded in an active market. At December 31, year 1, the quoted price for an identical investment was $400,000 and the quoted price for a similar investment was $430,000. Using the company's internal present value of cash flows model, the company arrived at a value of $410,000. What amount is the value of the investment on December 31, year 1? A. $400,000 B. $410,000 C. $430,000 D. $500,000

Answer 50

A. $400,000 Things to remember: Fair value of certain financial assets and liabilities is determined by the market, income, and cost approaches. FASB established a fair value hierarchy (ordered in preference and reliability) that describes the inputs used in these techniques. The appropriate technique and inputs depend entirely on the item being valued.

Question 51

Fern Co. has net income, before taxes, of $200,000, including $20,000 interest revenue from municipal bonds and $10,000 paid for officers' life insurance premiums where the company is the beneficiary. The tax rate for the current year is 30%. What is Fern’s effective tax rate? A. 27.0% B. 28.5% C. 30.0% D. 31.5%

Answer 51

B ``` INC TAX EXP CALC: 200 pretax inc -20 perm diff +10 perm diff =190 taxable inc x30% rate =57 ``` NI X RATE = INC TAX EXP 200 x rate = 57 rate = 28.5%

Question 52

A transportation company purchased a passenger bus for $100,000 on January 1, year 1. The company expects the bus to be used for 20 years if it follows a maintenance schedule of replacing the engine after 10 years and replacing the seats every eight years. It estimates that the current cost to replace the engine is $25,000 and the current cost to replace the seats is $10,000. The company uses straight-line depreciation and the bus has no residual value. The company considers any component equal to or greater than 10% of the overall cost to be significant. Under IFRS, how much depreciation expense should the company recognize for the bus for the year ended December 31, year 1? A. $5,000 B. $7,000 C. $7,250 D. $8,500

Answer 52

Choice B (Correct): IFRS component depreciation requires that each significant cost of an asset be depreciated separately according to its useful life. The engine, valued at $25,000, would be depreciated over 10 years, or $2,500; the seats, valued at $10,000, over 8 years, or $1,250; and the remaining $65,000 cost of the bus over 20 years or $3,250 for a total of $2,500 + $1,250 + $3,250 = $7,000.

Question 53

The functional currency of Nash Inc.’s subsidiary is the euro. Nash borrowed euros as a partial hedge of its investment in the subsidiary. In preparing consolidated financial statements, Nash’s translation loss on its investment in the subsidiary exceeded its exchange gain on the borrowing. How should the effects of the loss and gain be reported in Nash’s consolidated financial statements? A. The translation loss less the exchange gain is reported in other comprehensive income. B. The translation loss less the exchange gain is reported in net income. C. The translation loss is reported in other comprehensive income and the exchange gain is reported in net income. D. The translation loss is reported in net income and the exchange gain is reported as other comprehensive income.

Answer 53

Choice A (Correct): In general, when the functional currency is the foreign currency, the financial statements of a foreign investee are translated, as opposed to remeasured, with any translation adjustment reported in other comprehensive income. When the investment is hedged, any translation loss is recognized in income to offset the gain on the hedge instrument, with the excess translation loss reported in other comprehensive income.

Question 54

The following information pertains to Camp Corp.’s issuance of bonds on July 1, 20X3: ``` Face amount $800,000 Term Ten years Stated interest rate 6% Interest payment dates Annually on July 1 Yield 9% ``` At 6% At 9% Present value of one for ten periods 0.558 0.422 Future value of one for ten periods 1.791 2.367 Present value of ordinary annuity of one for ten periods 7.360 6.418 What should be the issue price for each $1,000 bond? A. $1,000 B. $864 C. $807 D. $700

Answer 54

Choice C (Correct): Each bond consists of a lump sum of $1,000 to be paid at the end of 10 years and an ordinary annuity of $60 per year for 10 years, which consists of annual interest payments equal to 6% of $1,000, payable at the end of each period. The proceeds from the issuance of each $1,000 bond will be the sum of the present value of those two components: Amount PV factor PV $1,000 X .422 = $422 $60 X 6.418 = $385 $807

Question 55

Smythe Co. invested $200 in a call option for 100 shares of Gin Co. $.50 par common stock, when the market price was $10 per share. The option expired in three months and had an exercise price of $9 per share. What was the intrinsic value of the call option at the time of initial investment? A. $50 B. $100 C. $200 D. $900

Answer 55

Choice B (Correct) and Choices A, C, D (Incorrect): The intrinsic value of a stock option is the market price less the strike price. At the time of initial investment each option had an intrinsic value of $1 ($10 market price less $9 strike price). The intrinsic value is 100 shares x $1 = $100.

Question 56

Disclosure is required by publicly-held companies if 10% or more of total revenues are derived from I. Sales to a single customer II. Export sales A. I only. B. II only. C. Both I and II. D. Neither I nor II

Answer 56

Choice C (Correct) and Choices A, B, D (Incorrect): Disclosure of segment information is required if 10% or more of total revenues are derived from sales to a single customer or if 10% or more of total revenues are derived from foreign operations.

Question 57

If a city government is the primary reporting entity, which of the following is an acceptable method to present component units in its combined financial statements? A. Consolidation. B. Cost method. C. Discrete presentation. D. Government-wide presentation.

Answer 57

Choice C (Correct) and Choices A, B, D (Incorrect): According to the Governmental Accounting Standards Board, “most component units should be included in the financial reporting entity by discrete presentation.”

Question 58

A statement of financial position for a nongovernmental, not-for-profit organization reports amounts for which of the following classes of net assets? A. Current. B. Long-term. C. With Board of Director restrictions. D. Without donor restrictions

Answer 58

Choice D (Correct) and Choices A, B (Incorrect): The statement of financial position of a nongovernmental, not-for-profit organization classifies net assets into two categories: with donor restrictions and without donor restrictions.

Question 59

On January 2, Year 2, Air, Inc. agreed to pay its former president $300,000 under a deferred compensation arrangement. Air should have recorded this expense in Year 1 but did not do so. Air's reported income tax expense would have been $70,000 lower in Year 1 had it properly accrued this deferred compensation. In its December 31, Year 2, financial statements, Air should adjust the beginning balance of its retained earnings by a A. $230,000 credit. B. $230,000 debit. C. $300,000 credit. D. $370,000 debit.

Answer 59

B Air, Inc. failed to record a $300,000 expense in the prior year, thus overstating net income and retained earnings. The overstatement of net income overstates the income tax payable. The entry to record the correction of the prior period error is show below. Dr. Retained earnings (net of tax) 230,000 Dr. Income tax payable (given) 70,000 Cr. Deferred compensation (a deferred liability) 300,000 Accordingly, the beginning retained earnings is debited (decreased) by $230,000.

Question 60

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? A. $6,000 B. $10,000 C. $16,000 D. $18,000

Answer 60

Choice C (Correct) and Choices A, B, D (Incorrect): Under the fair value option, an entity may report financial instruments, including investments in the stock of another entity, at fair value provided consolidation is not required. With 30% ownership, Peabody’s investment in Newman would normally require the equity method, but Peabody may, and did, elect the fair value option. Peabody will recognize its $6,000 share of dividends ($20,000 x 30%) as dividend revenue, plus recognize the $10,000 gain in fair value at the balance sheet date, for a total of $16,000 in income recognized for the period.

Question 61

If the fair value option is elected for available-for-sale debt securities, unrealized holding gains and losses (noncredit related) from these investments should be A. Reported as a component of other comprehensive income. (29%) B. Reported as a component of accumulated other comprehensive income. (7%) C. Reported as a component of income from continuing operations. (62%) D. Disclosed in the footnotes but otherwise not reported in the financial statements

Answer 61

Choice C (Correct) and Choices A, B, D (Incorrect): Investments in available-for-sale debt securities are reported each period at fair value as of the balance sheet date. Generally, unrealized holding gains and losses due to fluctuations in market prices are reported in other comprehensive income (OCI), which is closed to accumulated other comprehensive income (AOCI), a component of stockholders' equity. An entity, however, may elect the fair value option and apply it to some or all of its financial instruments, including available-for-sale debt securities. Under the fair value option, securities are still reported at their fair values as of the balance sheet date but the unrealized holding gains and losses are instead reported in income from continuing operations.

Question 62

cost incurred to grade and pave driveways & cost spent on lawn and garden sprinklers include in cost of land?

Answer 62

cost incurred to grade and pave driveways and parking lots would be capitalized and depreciated separated (land improvements) but would be excluded from the cost of the land. cost spent on lawn and garden sprinklers will be capitalized and depreciated separately but will be excluded from the cost of the land.

Question 63

The internal service fund had interfund billings.

Answer 63

When an internal service fund provides services for another agency of the governmental unit, the transaction will be recorded with a debit to a receivable entitled due from the other governmental department and a credit to interfund revenues

Question 64

Revenues were earned from a previously awarded grant.

Answer 64

When a grant is awarded that will be earned at some time in the future, the entry to record the transaction will include a debit to cash and a credit to deferred revenues. When the grant is subsequently earned, an entry will include a debit to deferred revenues and a credit to revenues.

Question 65

Property taxes were collected in advance.

Answer 65

Property taxes collected in advance represent revenues that have not been earned. They will be recorded with a debit to cash and a credit to deferred revenues.

Question 66

Short-term financing was received from a bank, secured by the city's taxing power.

Answer 66

When short term financing is received from a bank that will be repaid as a result of the city's taxing power, the city signs and records tax anticipation notes, a short term liability. The entry will involve a debit to cash and a credit to tax anticipation notes payable.

Question 67

Capital projects fund.

Answer 67

Accounts for major construction activities. A capital projects fund is used to account for the cost of major construction activities. When the project is completed, the asset is recognized in the general fixed assets account group.

Question 68

General fixed assets.

Answer 68

Accounted for in a self-balancing account group. General fixed assets are recognized as expenditures when acquired by a governmental fund. The assets are recorded, however, in the general fixed assets account group, a self balancing account group.

Question 69

Infrastructure fixed assets.

Answer 69

Reporting is optional. When costs are incurred for infrastructure, the fund incurring the cost records amounts incurred as expenditures. The governmental unit may then recognize the cost in the general fixed assets account group, but is not required to do so.

Question 70

General fund.

Answer 70

Accounts for property tax revenues. Property taxes are one of the main sources of revenues that are received by the general fund.

Question 71

General long-term debt.

Answer 71

Accounted for in a self-balancing account group. Proceeds from general long term debt are recognized as other financing sources by the fund receiving them. The liability is recorded in the general long term debt account group, a self balancing account group.

Question 72

Special revenue fund.

Answer 72

Accounts for revenues from earmarked sources to finance designated activities. A special revenue fund is similar to the general fund but is used to account for taxes that are earmarked for a specific purpose.

Question 73

Debt services fund.

Answer 73

Accounts for payment of interest and principal on tax supported debt. When general obligation bonds are issued, the resources that are set aside for the repayment of the bonds are accounted for in a debt service fund which makes principal and interest payments on the bonds.

Question 74

The company has sued a competitor for $3 million as a result of a patent infringement, and the company's attorney has advised that it is probable that the company will prevail with a judgement of between $500,00 and $1 million.

Answer 74

prevail=win Even though it is probable that the company will prevail in its lawsuit against a competitor, a gain contingency may not be accrued. It may, however, be disclosed provided the disclosure does not imply a greater likelihood of realization than actually exists. Accrual required for year 1? – No Amount of accrual for year 1? – $0 Note disclosure required for year 1? – Yes

Question 75

According to the notes of the staff auditor, there was an overstatement of ending inventory from a prior year. Although a correction of an error is not considered an accounting change, it is accounted for like a change in accounting principle.

Answer 75

Although retroactive adjustment to the financial statements is the usual treatment for a correction of an error, Eller's inventory errors correct themselves after two years.

Question 76

On November 22, 20X3, Edge initiated a lawsuit seeking $250,000 in damages from patent infringement.

Answer 76

A lawsuit initiated by Edge constitutes a gain contingency. It is never appropriate to accrue a gain contingency. In addition, although Edge may disclose the gain contingency, disclosure is not required.

Question 77

On December 15, 20X3, Edge guaranteed a bank loan of $100,000 for its president's personal use.

Answer 77

The guarantee of a bank loan for Edge's president represents a loss contingency that would only be accrued if it were probable that the president would default requiring Edge to repay the loan. Whenever a company guarantees the indebtedness of another, however, disclosure is required.

Question 78

On December 1, 20X4, Town was awarded damages of $75,000 in a patent infringement suit it brought against a competitor. The defendant did not appeal the verdict, and payment was received in January 20X5.

Answer 78

A gain contingency is not accrued until it is realized. Town was awarded damages of $75,000 during 20X4 and the decision is not being appealed. As a result, it is considered realized in 20X4 and will be accrued. Since a lawsuit for patent infringement is not a transaction in the ordinary course of business, it will require disclosure.

Question 79

Issued shares of common stock to purchase land

Answer 79

Although the proceeds from the issuance of stock is a financing activity and money spent to purchase land is an investing activity, when stock is issued to acquire land, it is a noncash financing and investing transaction. It is not reported on the statement of cash flows but is Included in supplemental disclosures.

Question 80

State University received two contributions during the year that must be used to provide scholarships. Contribution A for $10,000 was collected during the year, and $8,000 was spent on scholarships. Contribution B is a pledge for $30,000 to be received next fiscal year. What amount of contribution revenue should the university report in its statement of activities? A. $8,000 B. $10,000 C. $38,000 D. $40,000

Answer 80

Choice D (Correct) and Choices A, B, and C (Incorrect): Contributions received by a not-for-profit organization in the current period are reported as revenues on the statement of activities. Likewise any pledges that have been made may be accrued as receivables (net of an allowance for uncollectible pledges) by the organization in the period in which the pledges are made ($10,000 + $30,000 = $40,000).

Question 81

Chase City imposes a 2% tax on hotel charges. Revenues from this tax will be used to promote tourism in the city. Chase should record this tax as what type of nonexchange transaction? A. Derived tax revenue. B. Imposed nonexchange revenue. C. Government-mandated transaction. D. Voluntary nonexchange transaction.

Answer 81

Choice A (Correct): GASB 33 defines derived tax revenues as “result(ing) from assessments imposed on exchange transactions,” generally from earnings or consumption, such as income taxes or sales taxes. A hotel use tax derives from an exchange transaction (use of the hotel in exchange for cash) and is therefore a derived tax revenue.

Question 82

How should a nongovernmental, not-for-profit organization classify gains and losses on investments purchased with an endowment fund? A. Gains may not be netted against losses in the statement of activities. B. Gains and losses can only be reported net of expenses in the statement of activities. C. Unless explicitly restricted by donor or law, gains and losses should be reported in the statement of activities as increases or decreases in net assets without donor restrictions. D. Unless explicitly restricted by donor or law, gains and losses should be reported in the statement of activities as increases or decreases in the endowment fund itself.

Answer 82

Choice C (Correct): The gains and losses realized from the disposal of investments are reported in the statement of activities as increases or decreases in net assets without donor restrictions, unless their use is restricted by explicit donor stipulations or by law. Although the investments were purchased with an endowment fund, that does not restrict the use of gains or losses.

Question 83

During the current year, a nongovernmental, not-for-profit hospital received a gift of $10 million to be used for an addition to the physical therapy unit. In addition, the hospital also received an investment valued at $3 million with a donor-imposed restriction allowing only the use of the investment earnings for paying the salary of an additional physical therapist. As of the end of the current year, a physical therapist had notbeen hired, and earnings on the investment for the year were $150,000. What amount should be reported as net assets with donor restrictions in the year-end statement of financial position? A. $150,000 B. $10,000,000 C. $10,150,000 D. $13,150,000

Answer 83

Choice D (Correct) and Choices B, C (Incorrect): Net assets which are subject to donor-imposed restrictions are classified as net assets with donor restrictions. This includes the $150,000 in earnings on the investment, the gift of $10,000,000, and the donor-restricted endowment fund of $3,000,000.

Question 84

In governmental accounting, a fund is I. The basic accounting unit. II. Used to assist in ensuring fiscal compliance. A. I only. B. II only. C. Both I and II. D. Neither I nor II.

Answer 84

Choice C (Correct) and Choices A, B, D (Incorrect): In governmental accounting, a fund is the basic accounting unit and is used to assist in ensuring fiscal compliance. As a basic accounting unit, it is similar to a GAAP reporting entity. Funds help ensure fiscal compliance by segregating financial resources into sets of self-balancing accounts with each set controlled by a government entity with a specific mission and legal restrictions on the use of the resources.

Question 85

Which of the following funds of a governmental unit records depreciation? A. Capital projects fund. (24%) B. Debt service fund. (1%) C. Internal service fund. (71%) D. Special revenue fund. (2%)

Answer 85

Choice C (Correct): The internal service fund is an accrual-based fund (Roger Mnemonic: I-PIPE-Alot) and therefore would record depreciation. Modified accrual funds (Roger Mnemonic: PD-Consents-to-Smoking Grass) operate on the expenditure principle and generally ignore the GAAP principles of matching and amortizing costs benefiting multiple periods; therefore, they do not record depreciation. Note that while the internal service fund is a proprietary and not a governmental fund, it is included in Governmental Activities on the government-wide Statement of Net Position.

Question 86

Which of the following items is recognized for governmental activities in the government-wide statement of activities and not the statement of revenues, expenditures, and changes in fund balance for governmental funds? A. Transfers between governmental funds B. Property tax revenue for an amount deferred because it was not available C. A state grant awarded and received for road repairs that were completed this fiscal year D. Salaries payable at the end of the current year that will be paid at the beginning of the subsequent year

Answer 86

Choice B (Correct): Under the modified accrual basis, revenues may only be accrued if considered available, which generally means collectible within 60 days. That means this revenue will not be included in the modified accrual basis statement of revenues, expenditures, and changes in fund balance for governmental funds. By contrast, revenue may be deferred but still accrued as part of the accrual basis presentation of governmental activities on the government-wide statement of net position. Choice D (Incorrect): Revenues receivable expected to be received within 60 days, or liabilities expected to be paid within 60 days, are accrued on the modified accrual basis statement of revenues, expenditures, and changes in fund balance for governmental funds. Governmental activities on the government-wide statement of net position are presented on the accrual basis.

Question 87

Brandon County's general fund had the following transactions during the year: Transfer to a debt service fund $100,000 Payment to a pension trust fund $500,000 Purchase of equipment $300,000 What amount should Brandon County report for the general fund as other financing uses in its governmental funds statement of revenues, expenditures, and changes in fund balances? A. $100,000 B. $400,000 C. $800,000 D. $900,000

Answer 87

Choice A (Correct) and Choices B, C, D (Incorrect): A transfer to a debt service fund is an operating transfer because it is a movement of resources from one fund to another in order to finance the current period activities of the recipient fund. Such transfers are reported as Other Financing Sources (Uses) in the governmental fund statement of revenues, expenditures, and changes in fund balances. The purchase of equipment and the payment to a pension trust fund are external and quasi-external transactions, respectively; because payment was made for provided goods or services; therefore, they would be reported as expenditures, not Other Financing Sources (Uses).

Question 88

Candy Land, a nongovernmental not-for-profit organization, is preparing its year-end financial statements. Which of the following statements is required? A. Statement of changes in financial position. B. Statement of cash flows. C. Statement of changes in fund balance. D. Statement of revenue, expenses and changes in fund balance

Answer 88

Choice B (Correct): A not-for-profit organization is required to include a statement of financial position as of the reporting date, and statements of activities and of cash flows for the reporting period ending on that date whenever presenting a complete set of financial statements.

Question 89

Japes City issued $1,000,000 general obligation bonds at 101 to build a new city hall. As part of the bond issue, the city also paid a $500 underwriter fee and $2,000 in debt issue costs. What amount should Japes City report as other financing sources? A. $1,010,000 B. $1,008,000 C. $1,007,500 D. $1,000,000

Answer 89

Choice A (Correct) and Choices B, C, D (Incorrect): GASB 37 requires that proceeds of government-issued bonds, including bond premiums, be reported as other financing sources in governmental funds. Debt issue costs and underwriter fees are reported as expenditures, according to GASB 34. Therefore, Japes City should report the gross cash proceeds of $1,010,000 as other financing sources.

Question 90

How should a nongovernmental, not-for-profit organization report donor-restricted cash contributions for long-term-purposes in its statement of cash flows? A. Operating activity inflow. B. Investing activity inflow. C. Financing activity inflow. D. As a noncash transaction

Answer 90

Choice C (Correct) and Choice D (Incorrect): A not-for-profit organization should report donor-restricted cash contributions for long-term purposes as financing activity inflows in its statement of cash flows. Financing activities include permanently restricted contributions, such as contributions to a donor-restricted endowment fund, and contributions restricted for long-term purposes (such as for payment of long-term debt, bonds and money restricted for the acquisition of PP&E).

Question 91

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

Answer 91

Choice D (Correct) and Choices A, B, C (Incorrect): Governmental Accounting Standards Board (GASB) Concept Statement 1 states that the objective of financial reporting as it relates to state and local governments is to fulfill the government’s duty to be publically accountable, and to enable users to assess that accountability.

Question 92

Which of the following transactions is an expenditure of a governmental unit’s general fund? A. Contribution of enterprise fund capital by the general fund. (13%) B. Operating subsidy transfer from the general fund to an enterprise fund. (20%) C. Routine employer contributions from the general fund to a pension trust fund. (44%) D. Transfer from the general fund to a capital projects fund. (21%)

Answer 92

Choice C (Correct): Routine employer contributions from the general fund to a pension trust fund represent a quasi-external transaction and would therefore be reported as expenditures. The pension trust fund is providing a service to the general fund by maintaining the pension trust fund, which enables the general fund to fulfill its pension commitments to its employees. Choice B (Incorrect): An operating subsidy transfer from the general fund to an enterprise fund is an operating transfer because it represents movement of resources from one fund to another in order to finance current period activities. Since the purpose is to finance the activities of the enterprise fund rather than to pay for goods or services, it is an operating transfer rather than a quasi-external transfer. The general fund would record this operating transfer as Other financial use, not as an expenditure.

Question 93

Which of the following transactions should be reported as a liability in the general fund financial statements? A. An amount that is due within one year of the balance sheet date. (21%) B. An amount to be paid from current financial resources. (55%) C. An amount set aside to pay for an unfilled contract. (12%) D. Principal on long-term debt due 90 days after the balance sheet date. (10%)

Answer 93

Choice B (Correct): General fund financial statements are prepared using the current financial resource measurement approach, which entails reporting liabilities for items expected to be paid from current financial resources.

Question 94

An unrestricted grant received from another government to support enterprise fund operations should be reported as A. Contributed capital. (11%) B. Nonoperating revenues. (42%) C. Operating revenues. (35%) D. Revenues and expenditures. (10%)

Answer 94

Choice B (Correct): According to published GASB 34 guidance, operating grants and contributions, and grants and contributions that are not restricted to either operating or capital functions should be considered nonoperating revenue on the Statement of Revenues, Expenses and Changes in Fund Net Assets for proprietary funds.

Question 95

How should a nongovernmental not-for-profit organization report investments in its financial statements? A. Historical cost with no gains or losses reported. B. Par value with gains and losses reported in the statement of activities. C. Fair value with gains and losses reported in the statement of activities. D. Amortized value with gains and losses reported in the statement of comprehensive income.

Answer 95

Choice C (Correct) and Choices B, D (Incorrect): A not-for-profit entity reports its investments in debt and equity securities at market value on the statement of financial position. Realized and unrealized gains and losses are reported on the statement of activities.

Question 96

Ragg Coalition, a nongovernmental not-for-profit organization, received a gift of treasury bills. The cost to the donor was $20,000, with an additional $500 for brokerage fees that were paid by the donor prior to the transfer of the treasury bills. The treasury bills had a fair value of $15,000 at the time of the transfer. At what amount should Ragg report the treasury bills in its statement of financial position? A. $15,000 B. $15,500 C. $20,000 D. $20,500

Answer 96

Choice A (Correct): Ragg Coalition will report the investments at fair value. The donor’s basis in the contribution is of no relevance to the organization in preparing its statement of financial position.

Question 97

The general fund of ABC city acquired two police cars at the beginning of January 20X3, at a total cost of $40,000. The cars are expected to last for four years and have a $10,000 residual value. Straight-line depreciation is used. On the government-wide statement of net position at December 31, 20X3, the police cars will be reported under assets in the governmental activities column at which of the following amounts? A. $40,000 B. $32,500 C. $0 D. $22,500

Answer 97

Choice B (Correct) and Choices A, C, D (Incorrect): The government wide statement of net position is prepared on an accrual basis. As a result, the police cars would have initially been reported at cost of $40,000. At the end of the period, 1 year’s depreciation would have been recognized. The amount would be based on the cost of $40,000 minus the salvage value of $10,000, resulting in a depreciable basis of $30,000. This is divided by the 4 year life, indicating depreciation for one year would be ($30,000/4) $7,500. As a result, the carrying value of the asset would be ($40,000- $7,500) $32,500.

Question 98

Which of the following would not be included in government-wide financial statements? A. Pension trust fund. (75%) B. Internal service fund. (6%) C. Enterprise fund. (12%) D. Capital projects fund. (5%)

Answer 98

Fiduciary funds (ie, pension trust funds, investment trust funds, private purpose trust funds, and custodial funds) are not reported on government-wide financial statements. Things to remember: Government-wide financial statements include information on all governmental and proprietary fund activities. All fiduciary fund activities are excluded from government-wide financial statements.

Question 99

Which of the following would not be included in government-wide financial statements? A. Pension trust fund. (75%) B. Internal service fund. (6%) C. Enterprise fund. (12%) D. Capital projects fund. (5%)

Answer 99

``` A Fiduciary funds (ie, pension trust funds, investment trust funds, private purpose trust funds, and custodial funds) are not reported on government-wide financial statements. ``` Things to remember: Government-wide financial statements include information on all governmental and proprietary fund activities. All fiduciary fund activities are excluded from government-wide financial statements.

Question 100

At the beginning of the year, the carrying value of an asset was $1,000,000 with 20 years of remaining life. The fair value of the liability for the asset retirement obligation was $100,000. At year end, the carrying value of the asset was $950,000. The risk-free interest rate was 5%. The credit-adjusted risk-free interest rate was 10%. What was the amount of accretion expense for the year related to the asset retirement obligation? A. $10,000 (52%) B. $50,000 (25%) C. $95,000 (15%) D. $100,000 (6%)

Answer 100

Choice A (Correct) and Choices B, C, D (Incorrect): Accretion expense for asset retirement obligations (ARO) is recorded at the credit-adjusted risk free interest rate, not the risk-free interest rate. The ARO-related accretion expense for the year is $10,000, calculated by multiplying the fair value of the ARO at the beginning of the year by the credit-adjusted risk-free interest rate of 10% (100,000 X 10% = 10,000).

Question 101

Payne, Inc. implemented a defined-benefit pension plan for its employees on January 2, 20X3. The following data are provided for 20X3, as of December 31, 20X3: Projected benefit obligation $103,000 Plan assets at fair value $78,000 Net periodic pension cost $90,000 Employer's contribution $70,000 Unfunded prior service cost $4,000 Considering only the preceding data, what debit entry should Payne make in other comprehensive income for the year ended December 31, 20X3? A. $0 (11%) B. $1,000 (17%) C. $5,000 (42%) D. $25,000 (28%)

Answer 101

Choice C (Correct): With a projected benefit obligation of $103,000 and plan assets of $78,000, Payne must report a minimum pension liability of $25,000. Payne contributed only $70,000 to the plan based on pension cost of $90,000 indicating that there is already an accrued pension liability of $20,000. In order to achieve an accrued pension liability of $25,000, Payne will need to accrue an additional liability of $5,000, indicating a debit entry to OCI of $5,000 for the period.

Question 102

In performing the evaluation of credit losses for accounts receivable, a company uses a loss-rate method. It estimates that 5% of the receivables will be uncollectible. The year-end balance in accounts receivable is $740,000. The allowance for credit losses balance at the beginning of the year was $42,000. During the year, $6,000 of customer accounts that were written off last year were reinstated. What is reported in the income statement for credit losses at the end of the year? A. Credit loss expense of $5,000. (9%) B. Credit loss expense of $11,000. (19%) C. Reversal of credit loss expense of $5,000. (14%) D. Reversal of credit loss expense of $11,000. (56%)

Answer 102

D | a decrease is reported as a reversal of credit loss expense.