Weakspots

Question 1

When partners are forming a partnership and contributing capital, how is each type of contribution valued?

Assets?
Noncash assets subject to a liability? (ie property with mortgage)?
Liabilities?

Equity

Answer 1

Assets = fair value

Noncash asset = Propery at fair value and mortgate at PRESENT VALUE

Liabilities = Present value

Assets at fair value, liabilities at present value.

Equity

Question 2

What are nonmonetary items vs monetary items

General For Profit: Notes to FS

Answer 2

Monetary items dont change in value (ie cash, AR, AP, Bonds (investments and bonds payable)

Nonmonetary items fluctuate in value (ie PPE, inventory, intangibles) due to inflation etc.

General For Profit: Notes to FS

Question 3

What is a split interest arrangement?

General Non Profit

Answer 3

A** charitable remainder trust.**

A split-interest agreement is when both the donor and the nonprofit benefit, but at different times.

The donor usually gets income from the asset for a period (e.g., for life),

Then the nonprofit receives the remaining value after that period ends.

General Non Profit

Question 4

Equity Method (20%-50% +sig influence) – How does a company calculate investment income when excess fair value exists in the investee’s assets (e.g., inventory and equipment)?

Example: Sage Inc. owns 40% of Adams. Adams reports $120,000 net income and pays $20,000 in dividends. Excess FV = $10K in inventory (sold), $90K in equipment (18-year life). What does Sage report as investment income?

Answer 4

Under the equity method, investment income is adjusted for the investor’s share of:

Net income of the investee
→ 40% × $120,000 = $48,000

Less excess FV adjustment – inventory (fully sold)
→ 40% × $10,000 = ($4,000)

Less excess FV depreciation – equipment
→ 40% × $90,000 = $36,000
→ $36,000 ÷ 18 years = ($2,000)

✅ Total investment income reported = $42,000

Notes:

Inventory adjustments are made only when sold

Depreciable asset FV differences are amortized over their useful life

Dividends received do not affect income under equity method — they reduce the investment account, not the income statement

Question 5

How should a company account for amortization and impairment of an intangible asset when the asset becomes worthless on December 31 and amortization is recorded at year-end?

Example: Lava Inc. buys a patent for $90,000 (10-year life), amortizes at year-end, and the product is banned on 12/31/Y4. What amount should be charged against income in Year 4?

Answer 5

Since amortization is recorded at year-end, the company must first evaluate whether any events affect the asset’s value before recording amortization.

Years 1–3: $9,000/year amortization → $27,000 total

Carrying value at 12/31/Y3 = $90,000 − $27,000 = $63,000

On 12/31/Y4, the asset becomes worthless due to a government ban

🔴 Because the impairment occurred before amortization for Year 4 was recorded, the entire $63,000 remaining value must be written off as an impairment loss — not as regular amortization.

✅ Answer: $63,000 impairment loss in Year 4

GAAP Rule:
If amortization is recorded at year-end, and an impairment occurs on that date, impairment takes precedence and replaces amortization for that year.

Question 6

📄 Where must comprehensive income and its components be presented under U.S. GAAP?
Is it allowed in footnotes or under income from continuing operations?

Answer 6

Under U.S. GAAP, comprehensive income must be presented as part of the main financial statements, not in the notes or buried in subtotals.

There are only two acceptable formats:

A separate statement titled “Statement of Comprehensive Income”

A combined statement with net income, titled “Statement of Net Income and Comprehensive Income”

It cannot appear only: In the notes or As a line item below income from continuing operations

📌 Why? GAAP requires comprehensive income to have the same level of prominence as the income statement itself.

✅** Correct answer: Presented as part of the income statement or as a separate financial statement**

Question 7

In consolidated financials, how do you eliminate intercompany cost of goods sold (COGS) when inventory is sold between subsidiaries at a markup?

Example: Webb sells inventory to Twill for $56,000 (140% of Webb’s $40,000 cost). Twill sells all of it to third parties for $81,200. What COGS amount should be eliminated in the combined income statement?

Answer 7

When consolidating entities under common control, intercompany sales must be fully eliminated to avoid overstating COGS.

Webb’s original cost = $40,000

Twill bought it at 140% markup = $56,000 (what they recorded as COGS)

Combined COGS = $40,000 (actual cost), not $96,000 (Webb + Twill COGS)

✅ Therefore, the full $56,000 COGS recorded by Twill must be eliminated, not just the $16,000 markup.

Why?
Because we need to undo the entire intercompany transaction, not just the profit portion.

🧠 Key Rule: In consolidation, eliminate the full intercompany COGS from the buyer’s books — replace it with the seller’s original cost.

If sold externally → eliminate full intercompany COGS

**If unsold **→ eliminate only the markup (unrealized profit, ie 16k)

Question 8

📄 Under GAAP, how is the lease term defined?
Does it only include the noncancelable period?

Answer 8

No — the lease term includes more than just the noncancelable period.

✅ Lease term =

The noncancelable period,

Plus any optional renewal periods the lessee is reasonably certain to exercise

Minus any periods the lessee is reasonably certain to terminate early

❌ The lease term is not limited to just the noncancelable portion
❌ Do not include rolling month-to-month terms unless there’s reasonable certainty to continue

📌 Why? This ensures that lease liabilities and right-of-use assets reflect the most realistic duration of control under the lease agreement.

Question 9

Does the dollar-value LIFO method preserve old inventory costs by charging current costs to cost of goods sold?

Answer 9

✅ True

Explanation:
Dollar-value LIFO charges the most recent inventory costs to COGS (just like regular LIFO), while older layers remain in inventory. This preserves old costs on the balance sheet and reflects current costs in income.

Question 10

Are increases and decreases in dollar-value LIFO layers measured by changes in the total dollar value of the layer?

Answer 10

✅ True (but interpreted as inflation-adjusted)

Explanation:
Dollar-value LIFO measures changes based on the inflation-adjusted total dollar value of inventory. You must use a price index to deflate current-year inventory to base-year dollars before comparing. If the real (adjusted) value increases, a new layer is added.

Question 11

Will an inventory liquidation under LIFO result in higher profits during a period of rising prices?

Answer 11

Explanation:
LIFO liquidation means you’re dipping into older, cheaper inventory layers. In a period of rising prices, this results in lower COGS and artificially higher net income, since you’re not using current (more expensive) costs.

Question 12

How do you calculate deposits in transit in a bank reconciliation including prior month activity?

Answer 12

Get total deposits per the books (from the cash receipts journal)
→ Example: $141,200

Get total deposits per the bank statement
→ Example: $148,900

Subtract deposits that were in transit at the end of the prior month
→ These cleared this month but weren’t part of current-month activity
→ Example: $148,900 − $16,890 = $132,010 cleared for August

Subtract bank-cleared deposits from book deposits
→ $141,200 − $132,010 = $9,190 deposits still in transit

Deposits in transit = Book deposits − (Bank deposits − Prior month’s DIT)

Question 13

How do you calculate outstanding checks on a bank reconciliation, including prior-month activity and check recording errors?

Answer 13

Get total checks written per the books (from the cash payments journal)
→ Example: $176,125

Add any check-writing errors
→ Example: A $5,400 check was recorded as $4,500 → add $900
→ Total = $177,025

Get total checks cleared from the bank
→ Example: $138,300

Subtract prior month’s outstanding checks that cleared this month
→ These cleared now but were from last month
→ Example: $138,300 − $23,416 = $114,884 current-month checks cleared

Subtract cleared current-month checks from total written
→ $177,025 − $114,884 = $62,141 outstanding checks

Outstanding checks = (Corrected checks written) − (Bank-cleared checks − Prior month’s outstanding checks)

Question 14

How is dividends per share (DPS) used in the calculation of:

1. Dividends per share payout ratio
2. Earnings per share (EPS)

Answer 14

✅ DPS is the numerator in the dividends per share payout ratio
➤ Formula: DPS ÷ EPS

❌DPS is not used in the calculation of EPS
➤ Formula: (Net income − Preferred dividends) ÷ Weighted-average common shares outstanding

Payout Ratio = Dividends per Share ÷ Earnings per Share
→ Measures how much of earnings are paid out to shareholders

EPS = (Net Income − Preferred Dividends) ÷ Weighted-Average Common Shares Outstanding
→ Measures how much income is earned per common share

Question 15

Which action increases the quick ratio?

A. Buy inventory with long-term note
B. Speed up A/R collection
C. Pay off current payable with cash
D. Sell obsolete inventory at a loss

Answer 15

✅ Answer: D

Why D is correct: **Inventory (not in quick assets) is turned into cash (in quick assets), so numerator increases.
**
Why others are wrong:
A – Inventory isn’t included, and long-term debt doesn’t affect current liabilities.
B – A/R to cash = no change; both are quick assets.
C – Cash ↓ and liabilities ↓, but hurts numerator more.

Tip: Boost cash or quick assets without draining them to improve the ratio.

Question 16

How many days after the period end must a large accelerated filer submit Form 10-Q to the SEC?

Answer 16

A: ✅ 40 days

🧠 Key Definitions:
Large Accelerated Filer
* Public float of $700 million or more
* 10-Q within 40 days of quarter-end
* 10-K within 60 days of year-end

Accelerated Filer
* Public float of $75M–$700M
* 10-Q: 40 days
* 10-K: 75 days

Non-Accelerated Filer
* Public float under $75 million
* 10-Q: 45 days
* 10-K: 90 days

Remember 40/40/45 rule for 10-Qs:

Large & accelerated: 40 days

Non-accelerated: 45 days

Question 17

Union Corp. uses the conventional retail method and the LCM rule. Based on the following info, what is the estimated ending inventory at cost?

Beginning Inv: $12,000 (cost), $30,000 (retail)
Purchases: $60,000 (cost), $110,000 (retail)
Markups: $10,000 (retail)
Markdowns: $20,000 (retail)
Sales: $90,000 (cost)

Answer 17

Cost-to-Retail Ratio (CTR):
= (Beg Inv [cost] + Purchases [cost]) ÷ (Beg Inv [retail] + Purchases [retail] + Markups)

Ending Inventory at Retail:
= Beg Inv [retail] + Purchases [retail] + Markups − Markdowns − Sales

Ending Inventory at Cost:
= Ending Inv [retail] × CTR → result is in [cost]

19,200 is correct answer

Exclude markdowns when computing CTR, but include them in Step 2 when calculating ending inventory at retail.

Question 18

If goods are shipped FOB destination, what costs should the buyer include in inventory?

Answer 18

✅ Only the purchase price.
All shipping, packaging, and handling costs are seller’s responsibility under FOB destination.

FOB destination → title transfers when goods reach the buyer

Question 19

How are restricted and unrestricted cash contributions reported on a nonprofit’s statement of cash flows?

Answer 19

Unrestricted contributions → Operating inflow

Restricted for long-term asset purchase → Financing inflow

Use of restricted funds to buy asset → Investing outflow

🧠 Example:
$500K unrestricted = operating inflow
$200K restricted = financing inflow
$200K property purchase = investing outflow

Question 20

How should a nonprofit report unconditional pledges that will be collected over more than one year?

Answer 20

Report at present value of future collections

Discount is either:
* Subtracted directly from pledge receivable
* Or disclosed separately in the notes

Revenue is recognized in the year pledged, not when collected

🧠 Matching GAAP: Report receivables at net realizable value, just like accounts receivable

Question 21

🧾 In a nonprofit’s functional statement of expenses:
Which are supporting services, and how much should be reported as such?

Given:
Education = $300,000
Fundraising = $250,000
Management & General = $200,000
Research = $50,000

Answer 21

Supporting services = Fundraising + Management & General
= $250,000 + $200,000 = $450,000

🔹 Program services = Direct mission work (Education, Research)
🔹 Supporting services = Indirect support:

Fundraising (raising money)

Management & General (admin, HR, accounting)

Nonprofits must report program vs. supporting separately to show how funds are used.

✅ Answer: $450,000 in supporting services.

Question 22

🧾 A private university receives a $1,000,000 donation that is conditional on raising matching funds within 12 months. There’s only a 50% chance they’ll meet the condition.
How should this donation be reported?

(A) Restricted revenue
(B) Unrestricted revenue
(C) Refundable advance
(D) Memo footnote only

Answer 22

✅ Correct answer: (C) Refundable advance

• Conditional donations are not recognized as revenue until the condition is substantially met.
• Until then, the NFP has a liability to return the funds — recorded as a refundable advance.
• This is similar to deferred revenue: the org holds the money but hasn’t earned it yet.
• Once the condition is met, it gets reclassified to contribution revenue.

📌 Key Rule:

Conditional donations = Liability (refundable advance) until the condition is met.
Revenue is only recorded once the donor-imposed barrier is overcome.

Question 23

When a nonprofit uses unrestricted funds to invest in public stock, and the stock increases in fair value plus earns dividends, how should these changes be reported on the statement of activities?

(Example: Crestfallen buys stock for $35,000 with no donor restrictions, stock is worth $42,000 at year-end, and earns $1,000 in dividends.)

Answer 23

Report the full $8,000 ($7,000 gain in FMV + $1,000 dividend) as an increase in net assets without donor restriction.

Investments bought with unrestricted funds stay unrestricted, even when they earn income or grow in value.

Unrealized gains (FMV increases) and dividends are reported as revenue without donor restrictions.

“Temporarily restricted” classification is no longer used under GAAP for NFPs.

Question 24

🧠An AFS debt security has:
Cost = $200,000 both years
MV: Yr 3 = $185K, Yr 4 = $195K
Allowance: Yr 3 = $5K, Yr 4 = $2K

What amount goes to OCI in Year 4, and why?

Answer 24

1. FV increase:
   $195K − $185K = $10K total gain
2. Credit loss reversed:
   $5K − $2K = $3K (goes to income stmt)
3. OCI = remainder:
   $10K − $3K = $7K to OCI

OCI = Change in Fair Value − Change in Credit Loss Allowance

Where:
* FV Change = Current FV − Prior FV
* Allowance Change = Prior Allowance − Current Allowance
 - If allowance increased → it’s a new credit loss
 - If allowance decreased → it’s a credit recovery

You’re still subtracting the result either way — because all credit effects go to the income statement, and OCI gets what’s left.

Question 25

Mayce holds two trading securities: * Bond: cost $268K, FV $320K * Other debt: cost $75K, FV $70K What goes on the balance sheet and income statement, and how is bond cost handled?

Answer 25

Question 26

Alpha Co. buys a $500K, 5% bond for $516,250, including 3 months of accrued interest. Year-end FV = $512,000. What unrealized gain/loss goes on the income statement, and how do you handle the accrued interest?

Answer 26

✅ Step 1 – Back out accrued interest * $500K × 5% × (3/12) = $6,250 * Actual bond investment = $516,250 − $6,250 = $510,000 ✅ Step 2 – Compare to FV * FV = $512,000 * Unrealized gain = $512K − $510K = $2,000 ✅ Step 3 – Reporting * Trading securities → report gain in net income * Accrued interest = separate receivable, not part of cost 📌 Key Rule: Always subtract accrued interest from purchase price when calculating unrealized gains/losses.

Question 27

An AFS debt security had an unrealized loss recorded in OCI (Year 1). In Year 2, the security was sold for the same value as FV in Year 1. What entry removes the unrealized loss, and why?

Answer 27

* The unrealized loss was a debit to OCI in Year 1 (loss = debit, just like expense) * When the bond is sold, the loss becomes realized, so you must reverse the OCI entry ✅ Reclassification entry: * Credit OCI to remove the loss * Report realized loss in net income * Remove the investment from books 📌** OCI acts like a temporary income statement:** * Unrealized losses = debit * Unrealized gains = credit * But it bypasses net income and flows to equity as Accumulated OCI ✅ Correct answer: Credit OCI to reverse the loss

Question 28

A debt security is transferred from trading to available-for-sale (AFS). Cost exceeds fair value. What value is used for the transfer, and what are the general reclassification rules?

Answer 28

✅ Use: Fair value (market value) on transfer date 🚫 Cost is never used, regardless of whether the loss is temporary or permanent

Question 29

🧠 Sun Corp had AFS debt securities (original cost $650K). Dec 31, Year 2 FV = $575K June 30, Year 3 FV = $530K → reclassified to HTM Dec 31, Year 3 FV = $490K What unrealized loss is reported in Year 3 stockholders' equity? How is the FV drop after reclassification handled?

Answer 29

Step 1 – Before reclassification (FV still matters): * Dec 31 Y2 loss = $650K − $575K = $75K * June 30 Y3 loss = $575K − $530K = $45K * Total OCI loss = $120K → goes to accumulated OCI (AOCI) in equity Step 2 – After reclassification to HTM: * HTM securities are carried at amortized cost * Ignore FV changes after June 30 — do not include drop to $490K ✅ Answer: Sun reports $120,000 net unrealized loss in stockholders' equity (Future FV changes are not recorded for HTM) 📌 Key Rule: AFS → HTM: Record unrealized loss in OCI at reclass, then freeze it HTM = amortized cost, not fair value

Question 30

An AFS debt security had: * Cost = $75,000 * FV at 12/31/Y1 = $30,000 → unrealized loss = $45K * FV at 12/31/Y2 = $60,000 Smoke, Inc. also reclassified a trading security to AFS at $50K FV with a 70k CV, with no FV change afterward. What is the valuation allowance adjustment at 12/31/Y2, and what shortcut applies?

Answer 30

✅ Prior unrealized loss = $75K − $30K = $45K ✅ New unrealized loss = $75K − $60K = $15K ➡️ $30K decrease in valuation allowance 📌 Shortcut Rule: If cost stays the same, then: 👉 Change in valuation allowance = change in fair value ($30K FV increase = $30K decrease to unrealized loss account) The trading security's carrying cost was $70K, but when reclassified to AFS, it’s recorded at fair value ($50K). The $20K loss is recognized in net income, not OCI, and it does not affect the AFS valuation allowance.

Question 31

On Dec 31, Year 1, a company commits to discontinue a segment. * Year 1 op loss = $1,400,000 * Expected loss on asset disposal = $300,000 ("300k less than their carrying amount") * Expected Year 2 op loss = $500,000 Tax rate = 30% What amount should be reported in Year 1 as loss from discontinued operations?

Answer 31

**Only include: * Year 1 actual op loss * Expected asset disposal loss (do not include future op losses)** Pre-tax loss = 1,400,000 + 300,000 = 1,700,000 Tax benefit = 1,700,000 × 30% = 510,000 Net loss = 1,700,000 − 510,000 = $1,190,000 ✔️ Report $1,190,000 loss from discontinued ops in Year 1 Future op losses are excluded unless disposal is complete

Question 32

On Jan 1, Year 5, a company collected $18,000 total rent: * $8,400 related to Year 6 * $9,600 related to Year 7 The company incorrectly recorded all $18,000 as Year 5 revenue. What is the effect of this error on retained earnings at 12/31, Year 6?

Answer 32

The $18,000 was all unearned when collected. By end of Year 6, $8,400 has now been earned, but $9,600 is still unearned (for Year 7). Since the company recorded it all as revenue in Year 5, that $9,600 is still sitting in retained earnings. ✅ Retained earnings is overstated by $9,600 at 12/31, Year 6. Trap to avoid: Don’t assume any of the $18,000 was for Year 5 just because it was collected then. Always match revenue to the year it’s earned.

Question 33

Green Co. reports $375,000 of cash from operating activities (indirect method). Other info: * Depreciation expense = $130,000 * Loss on sale of land = $15,000 * Dividends paid = $25,000 * Cash proceeds from land sale = $75,000 What was net income?

Answer 33

**Use indirect method logic in reverse: Start with cash flow → subtract noncash add-backs:** 375,000 − 130,000 depreciation − 15,000 loss on sale = Net income = $230,000 📌 Ignore dividends and cash proceeds from land sale — those go in financing and investing, not operating. ✅ Final answer: $230,000 net income.

Question 34

A company paid $5,000 for inventory but only recorded $500. What’s the effect on current-year inventory and cash flow (indirect method)?

Answer 34

Inventory is understated — they wrote down less stuff than they bought. Cash flow is overstated — on paper it looks like they spent less than they really did. 📌 Think of it like this: You gave away $5 but wrote down 50¢. So it looks like you still have more money than you do. ✅ Answer: Inventory understated, cash flow overstated.

Question 35

Reve Co. had the following: * Purchased AFS bonds for $180,000 * Sold equipment for $10,000 * Gain on equipment sale: $6,000 * Dividends paid: $38,000 * Sold treasury stock: $75,000 What is net cash used in investing activities?

Answer 35

Only include actual cash flows related to investing: * **Outflow: Purchase of AFS bonds = $180,000** * Inflow: Proceeds from equipment sale = $10,000 (Do not include gain — already in net income) (Do not include dividends or treasury stock — those are financing) ✅ $180,000 − $10,000 = $170,000 net cash used Answer: $170,000

Question 36

According to the FASB Conceptual Framework, which of the following is included in comprehensive income? * Loss from discontinued operations * Investment by owners

Answer 36

✅ Loss from discontinued operations is included — it’s part of net income, which rolls into comprehensive income ❌ Investment by owners is excluded — it’s an owner transaction, not part of performance 📌 Comprehensive income = change in equity from non-owner sources **Includes:** -Net income (including discontinued ops) -OCI (e.g., unrealized AFS gains/losses, pensions, FX) **Excludes:** -Owner investments (e.g., **capital contributions, stock issuance)** -Dividends 💡 AFS securities are investments by the company, not by the owner — their unrealized gains/losses affect OCI and are part of comprehensive income. **Owner investments directly raise equity and skip income entirely.**

Question 37

Baer Food Co. reports the following in Year 2: * Net sales revenue: $187,000 * Interest revenue: $10,200 * Gain on sale of equipment: $4,700 * Gain from discontinued ops (net of tax): $12,000 What total revenues should be reported on a single-step income statement?

Answer 37

Single-step income statements group all revenues and gains together, **except for discontinued operations, which are reported separately.** So total revenues = 187,000 + 10,200 + 4,700 = $201,900 ❌ **Do not include the $12,000 gain from discontinued ops in total revenue — it’s shown as a separate line item below income from continuing ops.** ✅ Correct total revenue: $201,900.

Question 38

A company reports (ignore taxes): * Sales revenue: $350,000 * COGS: $150,000 * Operating expenses: $110,000 * Gain on sale of equipment: $35,000 * Foreign currency translation gain: $25,000 What is net income?

Answer 38

Net income includes only realized items: * Sales revenue: 350,000 * − COGS: (150,000) * − Op expenses: (110,000) * + Gain on equipment sale: 35,000 = Net income: $125,000 Foreign currency translation gain (25,000) is excluded — it's unrealized and goes to OCI. Key tips: **Net income = operations + realized non-operating items** (interest, equipment sale gains, dividends, FX gains/losses, and debt extinguishment gains/losses) **+ discontinued ops** OCI = unrealized items (FX, pensions, AFS securities, derivative cash flows) Comprehensive income = net income + OCI ✅ Final answer: $125,000 net income (FX gain not included)

Question 39

Cano Co. sells goods for 250,000 pula on 9/1/Y1 at a $0.20 spot rate. 12/31/Y1 rate: $0.19 2/1/Y2 settlement rate: $0.22 What foreign exchange gain or loss is reported in Year 2?

Answer 39

Initial recording: 250,000 × $0.20 = $50,000 12/31/Y1 remeasurement: 250,000 × $0.19 = $47,500 → $2,500 loss in Year 1 2/1/Y2 remeasurement: 250,000 × $0.22 = $55,000 → $7,500 gain in Year 2 (55,000 − 47,500) Foreign exchange gains/losses are reported in net income as rates change. **Key rule:** * Transaction date → record using spot rate * Balance sheet date → remeasure using year-end rate * Settlement date → remeasure again and recognize new gain/loss **Only compare settlement rate to balance sheet rate to calculate FX gain/loss at settlement** ✅ Year 2 answer: $7,500 gain in income.

Question 40

Rock Co. reports at year-end: * Net income: $400,000 * Foreign currency translation gain: $100,000 * Unrealized AFS gain: $20,000 * **Gain on sale of equipment: $50,000** What is comprehensive income?

Answer 40

Comprehensive income = net income + all items of OCI * Net income: 400,000 **(already includes realized gain on equipment)** * + FX translation gain (OCI): 100,000 * + Unrealized AFS gain (OCI): 20,000 = $520,000 comprehensive income Key rules: Net income includes all realized gains/losses **(e.g., equipment sale)** OCI includes unrealized FX gains, AFS gains, pensions, and hedges Comprehensive income = Net income + OCI (Exclude owner transactions like dividends or stock issuance) ✅ Final answer: $520,000

Question 41

Hila Co. reports: * Increase in inventory cost (nominal dollars): $15,000 * Increase in inventory cost (constant dollars): $12,000 What is the inflation component of the increase?

Answer 41

Inflation component = total increase (nominal) − real increase (constant) $15,000 − $12,000 = $3,000 Nominal dollars include both real value changes and inflation. Constant dollars remove inflation. The difference represents the pure inflation effect. ✅ Final answer: $3,000 inflation component

Question 42

In Nov–Dec Year 1, Dorr Co. receives $72,000 for 1,000 three-year subscriptions starting Jan Year 2. How much should be reported as subscription revenue in Year 1?

Answer 42

$0 — No revenue is earned in Year 1 because delivery starts in Year 2. According to SFAC 5, revenue is recognized only when: It is realized or realizable, and It is earned (i.e., delivery has begun) Since no magazines were delivered before 12/31/Y1, the entire $72,000 is unearned revenue (liability). 📌 Tax treatment doesn't affect financial reporting. ✅ Final answer: $0 subscription revenue in Year 1.

Question 43

Capsule Corp. reported the following for Year 4: * Beginning RE: $260,000 * Ending RE: $290,000 * Dividends declared: $90,000 * Beginning AOCI: $20,000 * Ending AOCI: $15,000 ***What is Capsule’s comprehensive income for Year 4?***

Answer 43

✅ $115,000 Net income is a plug from the RE rollforward: 290,000 − 260,000 + 90,000 = 120,000 OCI is the change in AOCI: 15,000 − 20,000 = −5,000 Comprehensive income = Net income + OCI 120,000 − 5,000 = 115,000 Comprehensive income includes both: * Net income (affects RE) * Other comprehensive income (affects AOCI) Do not deduct the OCI from RE — they affect separate equity accounts. Instead, combine them directly to get comprehensive income.