Test Bank MCQ 1 Flashcards
Question 22 AICPA.090812FAR During the current year, Wythe County levied $2,000,000 in property taxes, 1% of which is expected to be uncollectible. During the year, the county collected $1,800,000 and wrote off $15,000 as uncollectible. What amount should Wythe County report as Property Tax Revenue in its Government-Wide Statement of Activities for the current year? $1,800,000 $1,980,000 $1,985,000 $2,000,000
Correct: $1,980,000
Property taxes are an Imposed Nonexchange Revenue source for which the government receives value without directly giving something in equal value in exchange. In the Government-Wide Financial Statements, a Receivable is recorded when there is an enforceable claim - the property tax levy in this case - and Revenue should be recorded at the amount of Net Estimated Refunds and Estimated Uncollectible Amounts, in the period for which the taxes are levied [GASB Codification Section N50.115]. Given the facts in this question, revenue of $1,980,000 should be recognized ($2,000,000 gross levy less 1%, $20,000, estimated uncollectible amount). Had the question asked about revenue recognition in the General Fund, which uses the modified accrual basis of accounting, the answer would be different. In modified accrual accounting the concept of availability is an aspect of revenue recognition (GASB Codification Section P70.104]. Typically, that means that amounts collected during the year and up to 60 days into the next year are recognized in the current year as revenue. While the facts are incomplete in this question regarding the next year, the implication is that $1,800,000 would be recognized as revenues in the current year and $180,000 as deferred inflow of resources in the current year.
Question 24
AICPA.090112FAR-SIM
Assume that in acquiring a subsidiary, the parent determined that several depreciable assets had a fair value greater than book value. If the parent accounts for its investment in the subsidiary using the equity method, what effect will the amortization of the excess fair value over the book value of the subsidiary’s assets have on the following parent’s accounts?
Investment in Subsidiary, Equity Revenue from Subsidiary
Increase, Increase
Increase, Decrease
Decrease, Increase
Decrease, Decrease
Answer: Decrease, Decrease
When the fair value of a subsidiary’s assets is greater than book value, it is as though the parent paid more for the assets than the subsidiary paid for those assets. Using the equity method of accounting for the investment, the parent must depreciate the excess of fair value over book value. That equity entry would be: DR: Equity Revenue - to reduce it by the amount of depreciation on the excess of fair value over book value, and CR: Investment in Subsidiary - to offset a portion of the net income (or increase the amount of net loss) recognized from the subsidiary. Thus, both accounts would be decreased.
Question 30
TREPA-0060
Dee’s inventory and accounts payable balances at December 31, Year 2, increased over their December 31, Year 1, balances. Should these increases be added to or deducted from cash payments to suppliers to arrive at Year 2 cost of goods sold?
Increase in inventory, Increase in accounts payable:
Added to, Deducted from
Added to, Added to
Deducted from, Deducted from
Deducted from, Added to
Correct: Deducted from, Added to
This answer is correct. Cash payments to suppliers are converted to CGS as follows:
Cash payments to suppliers \+ Increase in AP – Increase in inventory Cost of Goods Sold
An increase in ending inventory represents the cost of items purchased during the period that remain unsold. Thus, the increase should be deducted from cash payments to suppliers. An increase in AP indicates that certain items purchased during the period have not yet been paid for and are not included in cash payments. Since these represent unrecorded purchases, the increase must be added to cash payments to suppliers to arrive at CGS.
Question 2
INVY-0041
When the double extension approach to the dollar-value LIFO inventory method is used, the inventory layer added in the current year is multiplied by an index number. Which of the following correctly states how components are used in the calculation of this index number?
In the numerator, the average of the ending inventory at base year cost and at current year cost.
In the numerator, the ending inventory at current year cost, and, in the denominator, the ending inventory at base-year cost.
In the numerator, the ending inventory at base-year cost, and, in the denominator, the ending inventory at current year cost.
In the denominator, the average of the ending inventory at base-year cost and at current year cost.
Answer: In the numerator, the ending inventory at current year cost, and, in the denominator, the ending inventory at base-year cost.
This answer is correct because the index number used to convert the current year’s inventory layer is calculated as follows:
Index = Ending inventory at current year cost
Ending inventory at base-year cost
This index indicates the relationship between current and base year prices as a percentage. When multiplied by a new layer (which is the increase in inventory in base-year dollars), the index will convert the layer to current year dollars.
Question 6
STK-0086
The following information is relevant to the computation of Chan Co.’s earnings per share to be disclosed on Chan’s income statement for the year ending December 31:
* Net income for year 5 is $600,000.
* $5,000,000 face value 10-year convertible bonds outstanding on January 1. The bonds were issued four years ago at a discount which is being amortized in the amount of $20,000 per year. The stated rate of interest on the bonds is 9%, and the bonds were issued to yield 10%. Each $1,000 bond is convertible into 20 shares of Chan’s common stock.
* Chan’s corporate income tax rate is 25%.
Chan has no preferred stock outstanding, and no other convertible securities. What amount should be used as the numerator in the fraction used to compute Chan’s diluted earnings per share assuming that the bonds are dilutive securities? $ 130,000 $ 247,500 $ 952,500 $1,070,000
Answer: $ 952,500
Because the bonds are convertible, the diluted earnings per share calculation requires interest expense (net of the tax effect) to be added back to net income. Interest expense on the bond is equal to $470,000 [($5,000,000 × 9%) + $20,000]. The tax effect is $117,500 ($470,000 × 25%). Therefore, the numerator is equal to $952,500 ($600,000 + $470,000 − $117,500).
Question 10
TREPA-0064
Adam Co. reported sales revenue of $2,300,000 in its income statement for the year ended December 31, year 2. Additional information was as follows:
12/31/Y1 12/31/Y2
Accounts receivable $500,000 $650,000
Allowance for uncollectible accounts (30,000) (55,000)
Uncollectible accounts totaling $10,000 were written off during year 2. Under the cash basis of accounting, Adam would have reported year 2 sales of $2,140,000 $2,150,000 $2,175,000 $2,450,000
Answer: $2,140,000
This answer is correct. To determine cash basis revenue, the solutions approach is to prepare a T-account for accounts receivable.
A/R dr. begin 500,000 Sales 2,300,000 end 650,000 cr. Write-offs ? Collections
An increase in receivables ($150,000) means that the amount of cash collected was less than sales, and this amount should be subtracted from accrual basis sales revenue to arrive at the cash basis sales revenue. Also, the $10,000 written off during year 2 means that the 12/31/Y2 receivable balance is $10,000 less than it would have been had no write-offs been made. In other words, this $10,000 represents recognized sales that will not result in the collection of cash and should be subtracted from accrual basis sales to determine cash basis sales revenue. Therefore, Adam should report $2,140,000 ($2,300,000 – $150,000 – $10,000) for year 2 cash basis sales.
Question 12 AICPA.910507FAR-P2-FA In 20X5, Elm Corp. bought 10,000 shares of Oil Corp. at a cost of $20,000. On January 15, 20X6, Elm declared a property dividend of the Oil stock to shareholders of record on February 1, 20X6, payable on February 15, 20X6. During 20X6, the Oil stock had the following market values: January 15 $25,000 February 1 26,000 February 15 24,000 The net effect of the foregoing transactions on retained earnings during 20X6 should be a reduction of $20,000 $24,000 $25,000 $26,000
Answer: $20,000
This answer includes the $5,000 disposal gain on the securities distributed as a dividend. Before assets are distributed as a property dividend, the unrecognized holding gain or loss is recognized.
Question 19
AICPA.911113FAR-P1-FA
In 2005, Cobb adopted the dollar-value LIFO inventory method.
At that time, Cobb’s ending inventory had a base-year cost and an end-of-year cost of $300,000. In 2006, the ending inventory had a $400,000 base-year cost and a $440,000 end-of-year cost.
What dollar-value LIFO inventory cost would be reported in Cobb’s December 31, 2006, balance sheet?
$440,000
$430,000
$410,000
$400,000
Answer: $410,000
The price level index for 2006 is 1.1 ($440,000/$400,000). Ending 2006 DV LIFO inventory equals the beginning inventory DV LIFO plus the increase in inventory at base-year dollars converted to 2006 prices:
Ending DV LIFO = Beginning DV LIFO + (increase at base-year dollars)(1.1)
= $300,000 + ($400,000 − $300,000)(1.1) = $410,000.
Question 26
BCC-0016
During year 2 the Henderson Company purchased the net assets of John Corporation for $800,000. On the date of the transaction, John had no long-term investments in marketable securities, deferred assets, or prepaid assets and had $100,000 of liabilities. The fair value of John’s assets when acquired were as follows:
Current assets $ 400,000
Noncurrent assets 600,000
$1,000,000
How should the $100,000 difference between the fair value of the net assets acquired ($900,000) and the cost ($800,000) be accounted for by Henderson?
The $100,000 difference should be recorded as a gain in the period of acquisition.
The noncurrent assets should be recorded at $500,000.
The current assets should be recorded at $360,000, and the noncurrent assets should be recorded at $540,000.
A deferred credit of $100,000 should be set up and then amortized to income over a period not to exceed 40 years.
Answer: The $100,000 difference should be recorded as a gain in the period of acquisition.
Per ASC Topic 810, a bargain purchase occurs when the fair value of net identifiable assets exceeds the acquisition cost. The bargain purchase is recorded as a gain on the date of acquisition.
Is recoverable cost used for impairment testing of assets held for sale?
No. The test for impairment and the measurement loss are the same.
- Use FV - cost to sell.
- No depreciation
- Reversal permitted
Is reversal of impairment permitted for assets held for sale?
Yes. Assets can be written up or down. Gains are limited to the amount of the initial impairment loss. BV can’t exceed the amount immediately before recording the initial impairment loss.
The first step in impairment of assets held for use is?
If book value>recoverable cost, asset is impaired.
Define recoverable cost.
Recoverable cost is sum of expected future nominal net cash inflows from use and ultimate disposal, including costs of maintaining the asset. This is not a PV, but a nominal number.
What is step 2 in impairment asset testing for asset held for use?
- Test for impairment loss: carrying value - fair value.
- Depreciate new basis
- No reversal of loss
Does IFRS permits revaluation of PP&E?
Yes.
