Weakspots Flashcards

Question

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 1

✅ 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.

Answer 2

* 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

Answer 3

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

Answer 4

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

Answer 5

✅ 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.

Answer 6

**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

Answer 7

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.

Answer 8

**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.

Answer 9

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.

Answer 10

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

Answer 11

✅ 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.**

Answer 12

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.

Answer 13

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)

Answer 14

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.

Answer 15

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

Answer 16

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

Answer 17

$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.

Answer 18

✅ $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.

Answer 19

Current cost accounting shows what it would cost today to replace nonmonetary items like inventory or equipment. It adjusts for inflation using specific price indices, and it’s only shown in the supplementary notes, not the main financial statements. How it's different: Current cost accounting = replacement cost in supplementary info ➤ Useful for understanding how inflation affects the cost to replace assets. Fair value accounting = market value on main statements ➤ Useful for showing current selling price or exit value of assets/liabilities. Purchasing power accounting = adjusts everything by overall inflation ➤ Useful for maintaining consistency in high-inflation environments.

Answer 20

Answer: D. Patent, net of accumulated amortization **A patent is a nonmonetary asset** because it does not involve a right to receive or obligation to pay a fixed amount of money. Its value is based on future economic benefits, not a fixed dollar amount. The accumulated amortization reduces the asset's book value but doesn't change its nature — it remains nonmonetary. Why the others are monetary: Held-to-maturity debt security: Represents fixed principal and interest payments. Prepaid rent: Represents a fixed, prepaid dollar amount for future use. Note receivable: Involves receiving a fixed sum of money. Key takeaway: Nonmonetary items = assets whose value fluctuates with economic conditions and are not tied to fixed dollar amounts. Monetary items = fixed dollar rights or obligations.

Answer 21

**They experience a purchasing power loss.** Monetary assets (e.g., cash, receivables) are fixed in dollar value.** Inflation reduces the real value of money — so holding fixed-dollar assets during inflation means those dollars buy less over time. Result: The asset’s real purchasing power decreases, even if the nominal amount stays the same. Key rule: Inflation → Loss on monetary assets Deflation → Gain on monetary assets Nonmonetary items are not affected by purchasing power gains or losses directly.

Answer 22

**Answer: Freight-out** Freight-out = shipping goods to the customer → selling expense Freight-in = bringing goods into inventory → inventory/COGS Office rent = may be split between selling and G&A depending on usage Interest expense = not an operating expense → reported separately **Key tip: Freight-out = last step in the sales process → include in selling expenses.**

Answer 23

✅ Only sales are included in total revenues Sales = operating revenue → included Purchase discounts = reduce inventory cost → not revenue Recovery of accounts written off = adjustment to bad debt allowance → not revenue Key rule: **Single-step income statements report actual revenue from operations only. —** not accounting adjustments or cost reductions. Groups all revenues together seperately, and all expenses grouped seperately.

Answer 24

✅ $885,000 Step-by-step: -Net income = $82,000 − $64,000 = $18,000 -Retained earnings = $18,000 − $3,000 (dividends declared) = $15,000 -Total equity = $750,000 (stock) + $15,000 (RE) = $765,000 -Assets = Liabilities + Equity = $120,000 + $765,000 = $885,000 Key takeaway: **Use the accounting equation: Assets = Liabilities + Equity,** and remember that declared dividends reduce retained earnings even if not yet paid. 🧠 Mental cue for the future: “They gave me stock, income, dividends, and liabilities… they want me to build equity and use the accounting equation to solve for total assets.”

Answer 25

✅ $100,000 Explanation: Gains on sales of assets are reported at their gross amount (pre-tax) on the income statement. Tax effects are shown separately in the income tax expense line — not netted against the gain. Key takeaway: Always report gains and losses before tax. Tax impacts affect net income, but not the amount shown for the gain itself.

Answer 26

**Net assets (book)** = **Total assets − Liabilities** $60,000 − $10,000 = $50,000 **Parent’s book share = Net assets − NCI fair value** $50,000 − $10,000 = $40,000 **Excess paid = Purchase price − Parent’s book share** $60,000 − $40,000 = $20,000 **Goodwill = Excess × 40%** $20,000 × 40% = $8,000 **Consolidated noncurrent assets = Parent NC assets + Sub NC assets + Goodwill** $90,000 + $40,000 + $8,000 = $138,000 Key takeaway: When NCI is measured at fair value, subtract NCI from the acquiree’s book net assets to determine the parent’s share. Compare that to the amount paid to find excess, then allocate accordingly.

Answer 27

✅ D. Addition to net income Why: **Deferred tax expense from depreciation is a noncash item caused by a temporary timing difference. Under the indirect method, it is added back to net income in the operating section because it reduces income for financial reporting but doesn’t affect actual cash.** Key tip: Deferred tax expense = noncash = operating adjustment → Add back to net income when caused by noncash items like depreciation.

Answer 28

✅ D. Operating income Explanation: GAAP requires intra-period tax allocation for items that must be shown net of tax, including: Discontinued operations Income from continuing operations Other comprehensive income (OCI) Certain equity items (e.g., prior period adjustments) **Operating income is a subtotal within continuing operations, presented before tax. It is not separately tax-affected — its tax impact is included later in the provision for income taxes.** Key takeaway: Only final presentation items are shown net of tax. Subtotals like operating income are shown gross (pre-tax).

Answer 29

✅ D. Cash flows per share should not be reported Explanation: GAAP prohibits disclosing cash flows per share — both on the face of the statement of cash flows and in supplementary disclosures. This is because users may misinterpret it as a measure of performance or available dividends, similar to earnings per share. Key tip: Unlike EPS (which is required for the income statement), **cash flow per share is never allowed — even as a footnote or supporting schedule.**

Answer 30

✅ $130,000 Explanation: Comprehensive income = Net income + current period OCI items Foreign currency loss is an OCI item → subtract it Unrealized gains on trading securities go in net income, not OCI **Income tax expense is already factored into net income** **Accumulated OCI is a balance sheet total — it is not included in current year’s comprehensive income** $150,000 − 20,000 = $130,000 Key takeaway: Only OCI changes during the year affect comprehensive income. **Do not include accumulated OCI balances or gains on trading securities.**

Answer 31

✅ A. Yes / Yes Explanation: Accrual accounting recognizes expenses using two main principles: Cause and effect: Match expenses to the revenues they help generate (e.g., COGS matched to sales) Systematic and rational allocation: Spread costs over the periods benefited (e.g., depreciation, amortization) **Both are core GAAP-based methods used to properly reflect expenses in the correct accounting period.** Key tip: Under accrual accounting, expenses are not recognized when paid — they are recognized when incurred, based on economic matching or systematic spread.

Answer 32

✅ C. A deferred inflow of resources Explanation: Under modified accrual accounting, revenue is recognized only when it is measurable and available. “Available” means expected to be collected within 60 days after year-end. Because the $200,000 won’t be collected within that window, it must be deferred and reported as a deferred inflow of resources, not revenue. Key tip: If it misses the 60-day window → defer it. Deferred inflow = revenue that’s not yet available under modified accrual.

Answer 33

✅ C. $308,000 Explanation: Unrealized profit in ending inventory from intercompany sales must be eliminated in consolidation if the inventory hasn't been sold to outside parties. Intercompany profit = $48,000 on $240,000 → 20% gross profit rate Ending inventory from intercompany sale = $60,000 Unrealized profit = 20% × $60,000 = $12,000 Consolidated current assets = $320,000 − $12,000 = $308,000 Key tip: Only eliminate unrealized profit on inventory still within the consolidated group. Sales to entities where the parent owns < 20% (e.g., Dean) are not consolidated, so no elimination is needed there.

Answer 34

✅ C. An outflow equal to the Year 2 principal payments only Explanation: At lease inception, the right-of-use asset and lease liability are recorded at present value — this is a noncash transaction and reported in supplementary disclosures. Going forward, lease payments are split into: **Principal → reported as a financing outflow** Interest → reported as an operating outflow So only the principal portion affects the financing section of the cash flow statement. Key takeaway: For a finance lease: Inception = noncash **Principal = financing outflow** Interest = operating outflow

Answer 35

**✅ $6,000 of compensation expense recognized in Year 2 Operating - ADD BACK** (because 8 months out of 36 months vested in Year 2) Calculation: $27,000 × (8 ÷ 36) = $6,000 Cash flow treatment (indirect method): Stock option expense is noncash, so it's added back to net income It appears in the operating section of the statement of cash flows Key tip: Under GAAP, stock-based compensation is recognized ratably over the vesting period based on fair value at grant date. Even though no cash is paid, the expense still reduces net income — so it must be added back when reconciling net income to cash from operations.

Answer 36

✅ **$20,000 outflow in investing activities** The $20,000 cash payment is a cash outflow for an investing activity (acquisition of land/building). **The $30,000 stock portion** (6,000 × $5) is a noncash investing and financing activity, reported **in supplemental disclosures,** not on the face of the cash flow statement. Key takeaway: Cash paid → investing outflow Stock issued → noncash disclosure Total asset acquired = $50,000 ($20k cash + $30k stock) Only the cash affects the SCF.

Answer 37

✅** ADD $200,000 inflow in the financing section** Explanation: Borrowing cash under a credit or loan agreement is a financing activity because it relates to raising funds through debt. The full $200,000 received in cash is shown as an inflow under financing activities. Key takeaway: Borrowing = financing inflow Only actual cash borrowed (not the total available credit line) appears on the statement of cash flows.

Answer 38

✅ $794,000 Step-by-step: Start with total unconsolidated equipment: Poe: $440,000 Shaw: $360,000 → Total = $800,000 **Eliminate the intercompany gain on equipment sale:** Poe sold equipment with an original cost of $30,000 to Shaw for $36,000 To avoid overstating consolidated equipment, eliminate the $6,000 unrealized gain → Adjustment = −$6,000 Final consolidated equipment: $800,000 − $6,000 = $794,000 **Key tip: In consolidation, eliminate any intercompany gain on the sale of depreciable assets. Always adjust to reflect the asset’s original cost on the consolidated books.** Eliminate only the intercompany profit, not the full amount of the transaction. Keep the asset, but carry it at the original cost to the consolidated entity.

Answer 39

✅ Goodwill (Acquisition Method, 100% Acquisition) Formula: Goodwill = Consideration transferred − FV of net assets acquired Consideration transferred = Cash paid or fair value of stock issued FV of net assets = Assets (at FV) − Liabilities 💡 Adjust assets for any FV step-ups (e.g., inventory, PPE) before calculating net assets. ✅ Consolidated Owners’ Equity Rule: Consolidated equity = Parent’s original equity + value of stock issued (⚠️ Do not include the sub’s equity — it is eliminated.) Parent equity stays Any new shares issued (e.g., to buy the sub) are added to common stock/APIC Sub's entire equity is wiped out in consolidation

Answer 40

**Scenario: Unpaid interest expense** Indirect method: ✅ Add back to net income Direct method: 🚫 Not reported **Scenario: Uncollected interest revenue** Indirect method: 🚫 No adjustment (already included in net income) Direct method: 🚫 Not reported (no cash received) **Key Rules to Remember** Indirect method adjusts net income for noncash items Direct method only shows actual cash received or paid 🧩 Think: "No cash? No entry (Direct). Adjust NI (Indirect)."

Answer 41

In consolidation, you reverse the “fake” gain and correct depreciation and equipment values. Using the numbers from Situation 1: **Remove the intercompany gain** Dr Gain on sale $40,000 **Restore parent’s accumulated depreciation** Dr Accumulated depreciation $15,000 (Parent had two years × $10,000/year = $20,000; sub recorded none, so we restore the portion already taken—here we restore $15,000 to match the sub’s Year 3) **Eliminate excess depreciation by the subsidiary** Cr Depreciation expense $5,000 (Sub depreciates $120,000÷8 = $15,000; parent would have done $100,000÷10 = $10,000; difference = $5,000) **Remove the equipment markup** Cr Equipment $20,000 (Sub’s cost $120,000 minus parent’s original $100,000 cost = $20,000) **Memory Cue “G.A.D.E.”** G = Gain on sale (Dr $40k) A = Accumulated depreciation (Dr $15k) D = Depreciation expense (Cr $5k) E = Equipment (Cr $20k)

Answer 42

When a parent sells inventory to a sub, the transaction must be eliminated since it's internal and inflates both revenue and profit. Peterson (Parent) sells inventory to Silver (Sub) for $50,000 Cost to Peterson: $30,000 → Intercompany profit = $20,000 60% sold to external customers, 40% remains in ending inventory 📌 Eliminating Journal Entry **Remove intercompany sales revenue** **→ Dr Sales $50,000** **Remove profit still sitting in ending inventory** → 40% × $20,000 = $8,000 **→ Cr Inventory $8,000** **Remove inflated cost of goods sold** Peterson recorded $30,000 in COGS Silver expensed $12,000 of profit (60% × $20,000) **→ Cr Cost of Goods Sold $42,000**

Weakspots Flashcards

(70 cards)