X Flashcards

Question

Which of the following statements is correct regarding the provision for income taxes in the financial statements of a sole proprietorship? The provision for income taxes should be based on business income using individual tax rates. The provision for income taxes should be based on business income using corporate tax rates. The provision for income taxes should be based on the proprietor's total taxable income, allocated to the proprietorship at the percentage that business income bears to the proprietor's total income. No provision for income taxes is required.

Answer 1

No provision for income taxes is required. A sole proprietorship business is not a taxable entity. Business income (or loss) is “passed through” to the owner. Therefore, there would be no required provision for income taxes. Instead, the taxes would be paid by the owner on the proprietor's personal tax return

Answer 2

$418,250 The noncurrent portion of the note payable to contest winner should be reported on the balance sheet net of discount. This means that the present value of the 19 future payments of $50,000 is the correct amount to be disclosed. This amount is the $418,250 cost of the annuity.

Answer 3

$15,660 stock are marked to fair value at each reporting period, with gains and losses reported in earnings. Dividends are treated as dividend income. Therefore, there is both an increase from the dividend and from the increase in fair value that must be recognized: • Dividend of $1240 + Increase in fair value ($93920 − $79500) of $14420 = Increase in income of $15660

Answer 4

Book value of capital assets sold during the year GASB requires a summary reconciliation between fund financial statements and government-wide financial statements. To adjust the total changes to governmental fund balances to the total change to the government-wide net position, additions and subtractions are needed. Capital asset purchases and payments of long-term debt principal would be considered expenditure reductions of governmental fund balances and would be added back, as asset acquisitions are not considered an expense reduction of net position. In preparing government-wide financial statements, internal service fund assets and liabilities would be added to those of governmental activities, requiring an addition, not subtraction, to net position. When capital assets were sold, the entire sales price would have been an increase to governmental fund balances, but only the gain on sale would be an addition to net position. Therefore, the book value of capital assets sold during the year is the only item requiring a subtraction to reconcile to the changes in net position.

Answer 5

Relevance and predictive value Relevance and faithful representation are the primary qualitative characteristics of accounting information. The components of relevance are predictive value, confirmatory value, and materiality. The characteristics of faithful representation are completeness, neutrality, and being free from error.

Answer 6

IFRS statements may present property, plant, and equipment first in the balance sheet. The categories of assets, liabilities, and stockholders' equity are quite similar within U.S. GAAP and IFRS (International Financial Reporting Standards). However, IFRS statements may present property, plant, and equipment first in the balance sheet.

Answer 7

$13,500 The annual expenses would be the $15,000 maintenance contract multiplied by 10/12 of the year covered, or $15,000 × 10/12 = $12,500 from March to the end of the year. Also, expenses would cover 1/5 ($1,000) of the $5,000 from the other costs for one of the five years: $12,500 + $1,000 = $13,500 total.

Answer 8

$0 The debt is a long-term liability and would not appear on the balance sheets of the governmental funds, although it would be reported in the governmental activities section of the government-wide statement of net position. The interest that is due very early in the following year has been deposited in the debt service funds. The expenditure for debt service would usually be recognized in the year of payment. The expenditure and related liability could be recognized in the debt service fund but is not required in the December 31, 20X1, statements. Therefore, the correct answer is $0.

Answer 9

Prior service costs not previously recognized as a component of net periodic pension costs Accumulated other comprehensive income (AOCI) is a component of equity on the balance sheet, presented separately from retained earnings and additional paid-in-capital. Total items of other comprehensive income (OCI) are transferred to AOCI at the end of each reporting period. FASB defines OCI as “revenues, expenses, gains, and losses that under generally accepted accounting principles are included in comprehensive income but excluded from net income” (FASB ASC 220-10-20). These items have not yet been realized. Some examples of OCI include the following: • Foreign currency translation gains or losses • Gains and losses (effective portion only) on derivative instruments that qualify as cash flow hedges • Unrealized holding gains and losses on available-for-sale debt securities • Pension or postretirement gains or losses (not recognized immediately as a component of net periodic benefit cost) • Prior service costs or credits Unrealized gains and losses from the ineffective portion of a derivative properly designated as a cash flow hedge and unrealized holding gains or losses on investments in equity securities are recognized immediately in income. A reduction of shareholders' equity related to employee stock ownership plans is generally the result of an increase in a related liability, not income.

Answer 10

$30,000 According to FASB ASC 810-10-20, a noncontrolling interest is "the portion of equity (net assets) in a subsidiary not attributable, directly or indirectly, to a parent. A noncontrolling interest is sometimes called a minority interest." The ownership interests in the subsidiary that are held by owners other than the parent is a noncontrolling interest. The noncontrolling interest in a subsidiary is part of the equity of the consolidated group. The noncontrolling (minority) interest is the interest of third parties in the acquired company (Kidd). Noncontrolling interest = Noncontrolling holding x Net assets of Kidd = (1.00 - 0.75) x ($50,000 + $70,000) = 0.25 x $120,000 = $30,000 Net assets can be computed in either of two ways: (1) book values of stockholders' equity or (2) book value of assets less book value of liabilities. Here, the book values of stockholders' equity are $50,000 for common stock and $70,000 for retained earnings.

Answer 11

Profit on sale, $720,000; Interest revenue, $146,000 When accounting for a lease from the perspective of the lessor, one needs to decide if the lease is sales-type, direct financing, or operating. In a sales-type lease, there can be an element of gross profit recognized by the lessor at the beginning of the lease, generally based on the difference between the sales price and the cost of the item to the lessor. Here that gross profit recognized immediately is $720,000, the difference between the selling price and the cost of the equipment ($3,520,000 – $2,800,000). After the first payment is received, the remaining lease obligation will be paid like a long-term liability, with interest accruing on the unpaid balance. The unpaid balance for the first year is generally the difference between the selling price and the rent payment (when the payment is made at the start of the year). The unpaid balance for interest to accrue on is thus $2,920,000 ($3,520,000 – $600,000). The interest accrues from the payment in July to the end of the year, thus $146,000 ($2,920,000 × 0.1 × 6/12).

Answer 12

Contributions receivable, valued at their present values Unconditional contributions receivable expected to be collected over more than one year should be valued using present discounted value techniques and appropriate assumptions. The contributions receivable are valued at present values, not future values. The contributions should be recognized as revenue in the period they are made and not deferred.

Answer 13

Financial reporting should provide information to determine whether current-year revenues were sufficient to pay for current-year services The GASB has established “accountability” as the cornerstone of financial reporting for governmental entities. Under GASB Concepts Statement 1, accountability consists of the following subobjectives: • Interperiod equity: Financial reporting should provide information to determine whether current-year revenues were sufficient to pay for current-year services. • Budgetary and fiscal compliance: Financial reporting should demonstrate whether resources were obtained and used in accordance with the entity's legally adopted budget; it should also demonstrate compliance with other finance-related legal or contractual requirements. • Service efforts costs and accomplishments: Financial reporting should provide information to assist users in assessing the service efforts, costs, and accomplishments of the governmental entity.

Answer 14

$22,000 To do the calculation, use a number as the bonds face value, say $100,000. If such a bond was purchased at a discount of 10,000, that would be a carrying value of $90,000 ($100,000 – $10,000). If, while the bonds were held, $2,000 of discount was amortized, then the carrying value of the bonds would be $92,000, as the discount amortized adds to the bond carrying value, so that the carrying value approaches face value of $100,000. If the bonds were then sold to another investor at a premium of $14,000, then the new investor would pay face value plus $14,000 for a total of $114,000 ($100,000 + $14,000). When an investment with a carrying value of $92,000 is sold for $114,000, a gain of the difference is recognized: • $114,000 – $92,000 = $22,000

Answer 15

$500,000 When Cliff City approved the purchase orders, the estimated amount is recorded in the (summary) journal entry: Encumbrances 5,000,000 Fund Balance--Reserved for Encumbrances 5,000,000 When the portion of the purchase orders were filled, the entry was reversed for the estimated cost amount of the portion of the purchase orders filled: Fund Balance--Reserved for Encumbrances 4,500,000 Encumbrances 4,500,000 The actual amount of expenditures may be more or less than the estimated amount and the amount paid may differ from the encumbered amount. However, that does not affect the encumbrance or the Fund Balance—Reserved for Encumbrances amounts. Therefore, the amount outstanding at June 30, 20X1, was $500,000. In the closing process, the outstanding Encumbrances and Fund Balance—Reserved for Encumbrances of $500,000 would be removed, and $500,000 of the post-closing Fund Balance would be displayed as “committed” or “assigned.”

Answer 16

Both IFRS and U.S. GAAP permit lease guidance to apply to intangible assets ``` Only IFRS (International Financial Reporting Standards) permits that a lessee may apply the leasing guidance to leases of intangible assets other than those under licensing arrangements; U.S. GAAP does not include this option. The other answer choices are correct: • U.S. GAAP restricts the definition of a lease to identified property, plant, or equipment. The IFRS lease definition is not restricted to only property, plant, or equipment; a lease can be for any asset. • IFRS uses a single-lease accounting model where all leases are finance leases; U.S. GAAP uses a dual-lease accounting model to differentiate between an operating lease and a finance lease. • IFRS includes a recognition exemption for low-value lease assets (approximately $5,000), while the U.S. GAAP standard does not list a specific cost threshold but does allow that “immaterial” assets do not need to be capitalized ```

Answer 17

$188,813 The commencement of a lease is the date of the lease agreement. Rental expense should be as of that date. When the lease payments begin later than the commencement date, the lease payments must be spread evenly over the longer period of time, which includes the months between the commencement date and the beginning of the lease payments. • $28,900 × 56 months = $1,618,400 • $1,618,400 ÷ 60 months = $26,973.33 • $26,973.33 × 7 months (June through December) = $188,813

Answer 18

$43,000 Goods owned by Opal, which are out on consignment, and goods in transit FOB shipping (title to goods passed to Opal upon shipment) are included in year-end inventory. Goods held by Opal on consignment for another entity are not included. Opal's inventory should be reduced by: Markup on merchandise out on consignment: (40% x $40,000) 16,000 Goods held on consignment by Opal: 27,000 Total reduction $43,000

Answer 19

$5,750 Initial amount of lease $135,000 Less first payment 20,000 Lease amount applicable to last half of 20X1 $115,000 Times interest rate (10% x 6/12 year) x .05 Interest revenue for 20X1 $ 5,750

Answer 20

the primary source for financial information about the entity to the primary users since information cannot be provided directly to these users. Financial statements serve as the primary, not the only, means for communicating financial information to those outside the entity. For example, press releases also can communicate information to users. Only the balance sheet is a “snapshot” in time of the financial condition of the entity. The other financial statements serve as a “motion picture” showing the impact of various activities occurring throughout the year. Since financial statements are designed for external reporting, they are not the principal tool for managing the entity. To manage an entity, managers require other types of information that are usually provided by internal managerial accounting reports

Answer 21

Both fund accounting and budgetary accounting Fund accounting segregates resources according to the purpose(s) for which they may be used. Thus, fund accounting helps ensure that the taxes required to be used for central district improvements are not expended for other purposes. Appropriations are adopted in the budget to authorize expenditure of resources during a particular budget period. Overexpenditure of appropriations—even for central district improvements—violates the budget law. Budgetary accounting maintains a record of the remaining appropriation authority available for specific purposes at any point in time. Thus, budgetary accounting helps assure that resources are expended legally by helping to prevent overexpenditure of appropriations

Answer 22

Matching The definition of matching is recording expenses and expired costs necessary to generate revenue in the same period as the revenue

Answer 23

Depreciation expense would be decreased and goodwill impairment would be assessed. Goodwill is the excess of the fair value of the consideration given over the fair value of the net identifiable assets acquired. The carrying amounts of Scarp's assets and liabilities approximated their fair values, except that the fair value of the building is less than its book value. Since Prim paid cash equal to the book value of the stock, the amount paid was greater than the fair value of the net identifiable assets of Scarp, resulting in goodwill being recognized. In this particular case, the amount of the goodwill is equal to the excess of the book value of the building over its fair value. One could argue that Scarp already should have recognized an impairment loss on its own books with regard to the building. However, there is insufficient information to know if the criteria specified in FASB ASC 360-10-05-4 have been met. The mere fact that the fair value of the building is less than its book value is not necessarily sufficient evidence. Thus, presumably the depreciation expense recorded by Scarp is based on the book value amount. In any event, the building should be included in the consolidated assets at its fair value, which is an amount lower than its book value. The consolidated depreciation should be based on this lower amount. Therefore, the consolidated depreciation expense is less than the sum of the depreciation amounts reported by Prim and Scarp as separate entities (i.e., before the consolidated statements are prepared). Thus, for consolidated financial statement purposes, depreciation is decreased from the amounts reported by the two separate entities. Regardless of the depreciation issue, FASB ASC 350-20-35-28 requires goodwill to be tested for impairment at least annually, as well as in the year of acquisition. Therefore, goodwill impairment must be assessed in this case.

Answer 24

$53,000 gain Upon the retirement of a bond, the difference between the reacquisition price (what you pay) and the carrying amount of the bond is a gain or loss. Carrying value of 11% bonds $600,000 + $65,000 = $665,000 Less: Call price 600,000 x 102% = 612,000 Pretax gain from retirement of bonds $ 53,000

Answer 25

$5,000 Reciprocal interfund activities are activities that affect two funds resulting from loans or services provided and received. Nonreciprocal interfund activities consist of flows of assets without equivalent flows in return. The transfer of $200,000 from the general fund to establish a new enterprise fund and the routing transfer of $50,000 from the general fund to the debt service fund are of this type. Only the billing by the internal service fund represents a symmetrical transaction between two funds.

Answer 26

$600,000 Oak City's net property taxes for 20X1 would be $600,000. This is the collections during 20X1 and the amount expected to be collected in the first 60 days of 20X2. Amounts expected to be collectible during the first 60 days of the following year can be recorded as revenues of the current year if they are legally usable to pay current liabilities of the current year; that is, if they are available.

Answer 27

$100,000 GASB 1800.102 states that an interfund transfer without requirement for repayment must be recorded as other financing uses (or sources to the recipient). The payment to a pension trust fund and purchase of equipment are expenditures

Answer 28

$13,500 The annual expenses would be the $15,000 maintenance contract multiplied by 10/12 of the year covered, or $15,000 × 10/12 = $12,500 from March to the end of the year. Also, expenses would cover 1/5 ($1,000) of the $5,000 from the other costs for one of the five years: $12,500 + $1,000 = $13,500 total.

Answer 29

Neither cumulative effect of a change in accounting principle nor pro forma effects of retroactive application of new depletion base An increase in the estimated quantity of copper recoverable from its mine represents a change in accounting estimate. FASB ASC 250-10-45-17 provides that a change in accounting estimate be accounted for in the period of change or the period of change and future affected periods if both are affected by the change. Also, "a change in an estimate should not be accounted for by restating amounts reported in financial statements of periods or by reporting pro forma amounts for prior periods." Therefore, no is the appropriate answer for both suggested treatments.

Answer 30

$1,100,000 When a purchase is made of the stock of another company, and the equity method is applicable to it (generally from 20% to 50% ownership acquired), if the depreciable assets have a fair value in excess of the book value, then the acquiring corporation may need to use its purchase price (the higher fair value) for those assets to figure out its depreciation when recognizing its earnings from the equity method holdings. The owned corporation, Penn, continues to depreciate its assets at their book value, but the owning corporation, Otto, will use the fair value of those assets at the time of purchase to figure out income. Thus, Otto must adjust its income (from Penn) as Penn’s income less the additional depreciation, which is part of the purchase price. The additional depreciation ($8,000) is computed as the total fair value of the assets multiplied by the percentage of ownership (40%), divided by the remaining useful life of the assets. Working backwards: • $8,000 × 5 years (Remaining useful life) ÷ 0.40 (Ownership) = $100,000 Thus, when Otto bought in, the fair value of Penn must have been $100,000 over book value, or $1,100,000.

Answer 31

$90,064 When bonds are sold with a face interest rate (i.e., 5%) less than the market rate (i.e., 8%), they will be sold at a discount, which is calculated as follows: Discounted principal $100,000 × 0.68058 = $ 68,058 Discounted interest payments $100,000 × 5% = $5,000 × 3.99271 = 19,964 Selling price (carrying amount) 88,022 Face amount (100,000) Discount on Bonds Payable $ 11,978 ========= Interest Amortized Date Cash Expense Discount Carrying Value Jan. 1,Y1 $88,022 Dec. 31, year 1 $5,000 $7,042 $2,042 $90,064 $100,000 × 5% $88,022 × 8% ($7,042 – $5,000) ($88,022 + $2,042)

Answer 32

It should be included as a decrease in net assets without donor restrictions. All expenses reported on the statement of activities by a not-for-profit are reported as decreases in net assets without donor restrictions. Although not requiring a cash payment, depreciation is an expense.

Answer 33

Credit deferred revenues In order to prevent property taxes collected in advance from increasing the fund balance in a period before the related assets can legally be expended, a deferred revenue account (a liability like Unearned Revenue) is credited (with corresponding debit to cash

Answer 34

$100,000 Any legal costs in a successful defense of a patent right are capitalized into the patent account. Any unsuccessful legal costs in a patent defense are expensed as legal expenses. Thus, only the $100,000 would be expensed

Answer 35

Income from continuing operations, with separate disclosure (either on the face of statement or in the notes) FASB ASC 830-30-45-17 provides: "It is also necessary to recognize currently in income all exchange gains and losses from remeasurement of monetary assets and liabilities." FASB ASC 830-30-45-18 states: "An analysis of the changes…shall be provided in a separate financial statement, in notes to the financial statements, or as a part of a statement of changes in equity."

Answer 36

$18,000 When applying the equity method to an investment for financial accounting purposes, the income earned by the company partially owned is recognized by the owning investing company on its own books. Lundy has financial accounting income of $90,000 ($225,000 × 0.40) and this income is not recognized for tax purposes until received in dividends later on. Of course, Lundy did receive some dividends already, $30,000 ($75,000 × 0.40). Thus, $60,000 of deferred income for tax purposes will generate a future tax due, a deferred tax liability now of $18,000 ($60,000 × the future tax rate of 0.30). All deferred tax liabilities and deferred tax assets are classified on the balance sheet as noncurrent.

Answer 37

Permanent Fund The GASB Codification directs that resources that must be held as investment principal with earnings restricted to support the reporting government's programs for a specific purpose must be accounted for in a permanent fund. The gift received by Roy City meets this description. Investment trust funds and private-purpose trust funds are both fiduciary funds that should be used to hold resources held in trust for others and not for gifts received by the government itself. A special revenue fund could be used to account for the income from the gift, but not for the investment of the gift itself.

Answer 38

Financial statements include property with a carrying amount increased to management's estimate of market value. Reliability was addressed in SFAC 5.63. Specifically, the FASB noted: "To be reliable, information about an item must be representationally faithful, verifiable, and neutral. To be reliable, information must be sufficiently faithful in its representation of the underlying resource, obligation, or effect of events and sufficiently free of error and bias to be useful to investors, creditors, and others in making decisions." Clearly, values assigned to property based on management's estimate of fair value are not representationally neutral and would not be considered reliable as defined by the SFAC 5. Late financial statements violate timeliness (relevance), not reliability. Note: The term “reliability” is still used in SFAC 5, even though it has changed to “faithful representation” in SFAC 8.3.

Answer 39

$13,000 Current maturities of long-term debt on December 31, 20X1, include the following: 14-1/2% term note (due 20X2) $ 3,000 8% note (1/11th of $110,000) 10,000 Total $13,000 ======= Note: The interest due on the 8% note on December 31, 20X2, is classified as interest payable; this amount is not part of the current maturities of the long-term debt. The 11-1/8% term note and 7% debentures are of course, noncurrent (due 20X5 and 20X6, respectively).

Answer 40

Defensive-interval ratio only The defensive-interval ratio is a measure of time the company can survive (continue to pay operating expenses in cash) using only the quick assets (cash, marketable securities, and net accounts receivable). Thus, it is computed by dividing total quick assets by average daily cash expenditures. This is a liquidity measure, as it assesses how long a company can continue to keep up with its debts. Return on stockholders' equity is a profitability measure, based on dividing net income by stockholder's total equity investment in the company. Return on stockholders' equity is a performance measure, not a liquidity measure.

Answer 41

When the underlying transaction takes place When a state (provider) shares a portion of revenues resulting from its sales tax with local governments (recipients), both provider and recipient governments should account for the event as a voluntary or government-mandated nonexchange transaction, as indicated by the specific situation. Thus, the provider government would recognize the sharing of revenues, its expenditure and liability, in the same period that the recipient governments recognize related revenues: when all eligibility requirements have been met. Because the sharing is based on a continuing appropriation (no annual appropriation required), eligibility requirements are met as each sales transaction occurs.

Answer 42

Dividends received from investments FASB ASC 230-10-45-25 identifies several classes of receipts and payments that should be used in reporting cash flows from operating activities using the direct method. Included in the list of items are interest and dividends received. The transactions or events related to the other items listed are not reported in the operating activities section

Answer 43

providing schedules supporting Airport fund information. The question makes it clear that the expense categories in the combining enterprise funds statements are not detailed enough for the grant reporting. The additional detail is not one of the items required as supplementary information. The Airport fund would not be included in the combining fund statements of governmental funds because it is an enterprise fund. The additional detail should be shown in a schedule in order to show compliance with finance-related legal and contractual provisions

Answer 44

Custodial Fund When one governmental entity collects revenues for another and has the responsibility to remit the funds to the other entity, the first entity acts as a fiduciary for the second. The state must record the collected taxes in a custodial fund. This is a fund which allows the collection and subsequent remission of the monies to be recorded without affecting the funds with which the state itself operates. (GASB 1300.114)

Answer 45

$23,000 Because the patent defense was successful, the costs are capitalized and amortized over the new remaining useful life of the patent. The amount is computed as follows. (Note that the $500,000 spent to develop the “new idea” was considered research and development cost, and not capitalized as part of the cost of the patent itself.) Cost of patent $ 80,000 Patent amortization for 20X5 through 20X8 (($80,000 ÷ 8 years) × 4 years) (40,000) Carrying value of patent on 01/01/X9 $ 40,000 Defense costs to capitalize 75,000 Total cost of patent $115,000 Patent amortization for 20X6 ($115,000 ÷ 5 years) $ 23,000

Answer 46

A decrease in retained earnings and no effect on additional paid-in capital Using the cost method of accounting, additional paid in capital from treasury stock is credited when treasury stock is reissued at excess. The sale of the treasury stock resulted in a $120,000 loss: • $12 selling price − $16 cost to purchase = $4 • 30,000 shares × $4 = $120,000 The journal entry for reissuance of the treasury stock is as follows: Cash ($12 x 30,000) 360,000 Retained Earnings 120,000 Treasury Stock ($16 x 30,000) 480,000 There was only one treasury stock reissuance so there is no additional paid in capital transaction to be made. Therefore, under the cost method, Glean would record the loss (decrease or debit) to retained earnings and there would be no effect on additional paid-in capital.

Answer 47

The goods or services are not interdependent or interrelated. The following factors address the concept of distinctiveness: (1) the entity provides a significant service of integrating the goods or services with other goods or services into a bundle that represents the combined output or outputs for which the customer has contracted (i.e., the entity is using the goods or services as inputs to produce or deliver the combined output(s) specified by the customer; (2) one or more of the goods or services significantly modifies or customizes one or more of the other goods or services promised in the contract; and (3) the goods or services are highly interdependent or highly interrelated.

Answer 48

$252,000 After Sage issued the additional $200,000 in equity, its total equity was $700,000 ($500,000 + $200,000). Thyme now owns 16,000 shares out of the total 25,000 (20,000 + 5,000) shares outstanding, or 64% (16,000 ÷ 25,000). The remaining 36% (100% − 64%) accounts for a noncontrolling interest of $252,000 ($700,000 × 36%).

Answer 49

Accruals are concerned with expected future cash receipts and payments, while deferrals are concerned with past cash receipts and payments. Accrued items represent economic events that have already occurred, such as expenses, but have not yet been settled or paid. Deferrals represent items that have been settled or paid for in advance, but their associated underlying economic event has not yet occurred.

Answer 50

GAAP applicable to nonbusiness organizations differ significantly from those applicable to business enterprises and among the various types of nonbusiness organizations. GAAP applicable to nonbusiness organizations differ significantly from those applicable to business enterprises. Moreover, applicable GAAP differ significantly among the various types of nonbusiness organizations (e.g., between government hospitals and nongovernment hospitals and between government educational institutions and nongovernment educational institutions).

Answer 51

Babcock must have a signed agreement from Mendenhall to report the items in an offsetting manner. Generally, the offsetting of assets and liabilities in the balance sheet is improper unless a right of setoff exists. The four criteria to establish a right of setoff that permits for a firm to report items in an offsetting manner are: 1. each of the two parties owes the other determinable amounts, 2. the reporting party has the right to set off the amount owed with the amount owed by the other party, 3. the reporting entity intends to set off, and 4. the right of setoff is enforceable by law. A signed agreement is the only answer choice that is not one of the four criteria.

Answer 52

$170,000. Because progress on the contract can be reasonably measured, Stewart would recognize gross profit over time in 20X4 of $180,000, calculated as follows: • $450,000 ÷ ($450,000 + $300,000) = 60% complete • Total estimated gross profit on the contract at the end of 20X4 equals $300,000 ($1,050,000 Contract price – Total costs to complete ($450,000 + $300,000)) • $300,000 × .60 = $180,000 At the end of the contract, total gross profit has increased by $50,000 because costs turned out to be less than estimated. The gross profit recognized in 20X5 is computed as follows: • [$1,050,000 – ($450,000 + $250,000)] – $180,000 = $170,000.

Answer 53

$248,000 • Bond issue cost related to bonds retired = 1/2 of $6,000 = $3,000 • Bond issue cost amortized by 06/02/X6 = 5/15 of $3,000 = $1,000 Face amount of bonds retired (1/2 of $500,000) = $250,000 Less unamortized bond issue costs ($3,000 - $1,000) = 2,000 Bond carrying value prior to retirement $248,000 (Used to compute gain or loss on retirement) ========

Answer 54

general fund unrestricted revenues. Unless specifically restricted, earnings on restricted investments are recorded as an increase in net assets without donor restrictions. Restrictions would only apply in this case to the investment but not the income from the investment.

Answer 55

Income statement In discussing the financial statements for not-for-profit entities (NFPs), the FASB Codification states a “statement of activities for NFPs is the financial statement that an NFP issues instead of a business entity's income statement.”

Answer 56

There would be no impact on the governmental fund financial statements. Capitalizing the art collection means recognizing it as a capital asset in the records. Governmental funds do not include capital assets and therefore do not include depreciation of those assets. Usually, general capital assets are generated by governments making expenditures to build or acquire the assets. In this case, the government made no expenditure of resources to acquire the capital asset. Therefore, neither the capital asset nor any expenditure will be recognized in the governmental funds. The choice between two governmental funds for this transaction, the general and the permanent fund, is moot.

Answer 57

$50,000 The current-year effective annual tax rate is used for interim reports: $200,000 × 0.25 = $50,000

Answer 58

Assets, liabilities, and net assets The statement of financial position is the term for the balance sheet reported by not-for-profit (NFP) entities. Balance sheets report the balances of permanent accounts on a specific date. Therefore, income, expenses, or changes in net asset categories are not reported. The FASB recommends that the financial statements of an NFP focus on the entity as a whole. The NFP account equation uses the term “net assets” for equity. Its accounting equation is assets equal liabilities plus net assets.

Answer 59

Revenue related to licenses that provides functional intellectual property should generally be recognized when the license is granted, while revenue for symbolic intellectual property would generally be recognized over the term of the license. Functional intellectual property has significant standalone functionality (for example, the ability to process a transaction, perform a function or task, or be played or aired); it derives a substantial portion of its utility from its significant standalone functionality. Revenue for licenses of functional intellectual property would be recognized when access to the license is granted. Symbolic intellectual property does not have significant standalone functionality; substantially all of its utility is derived from its association with the entity’s past or ongoing activities, including its ordinary business activities. Revenue for licenses of symbolic intellectual property is recognized over the period of the license.

Answer 60

A nonconcurrent liability of $4,000 All deferred tax assets and liabilities are classified as noncurrent on the balance sheet, regardless if they are related to a current or noncurrent item. Note that “amount” is singular, indicating that separate asset and liability amounts should be “netted,” leaving a single amount. Amount to be reported in Bren's noncurrent section of balance sheet at December 31, 20X1: Deferred tax liability $15,000 Less deferred tax asset (3,000) Less deferred tax asset (8,000) Net noncurrent liability to be reported on balance sheet $ 4,000

Answer 61

The residual value guarantee generally results in operating classification by lessees. Residual value guarantees generally result in finance classification by lessees. The other answer choices are correct: The residual value guarantee may be provided by the lessee or a third party. Only the amount probable of being paid is included in determining the lease liability and the right-of-use (ROU) asset. The residual value guarantee is made to the lessor by the lessee that the value of an underlying asset returned at the end of the lease will be at least a specified amount.

Answer 62

$437,000. When applying the dollar-value LIFO retail method, you need to (as in dollar-value LIFO) restate ending-year retail to base-year prices: $660,000 ÷ 1.10 (1 + 10% increase) = $600,000 This is a $100,000 increase in the ending-year retail amount over the retail amount at the beginning of the year (in base-year prices). Now, determine the ending inventory using dollar-value LIFO retail directly, by adding to the beginning inventory of $360,000 the new layer of $100,000 multiplied by both the new layer’s cost-to-retail percentage and the new layer price level of 1.1: $360,000 + ($100,000 × 0.7 × 1.1) = $437,000

Answer 63

Accounts receivable: No effect; Allowance for uncollectible accounts: Increase The entry to record the collection of an account previously written off would be: Cash XXX Allowance for uncollectible accounts XXX

Answer 64

accrued expenses. The cash basis of accounting, as compared to accrual-basis accounting, will understate income when accrued expenses decrease because that decrease must have been the result of paying out more cash than expenses incurred. A decrease in accounts receivable would have the opposite effect. This decrease would occur as more cash was collected than sales made, producing a higher cash basis income. In summary, cash basis income is: higher when accounts receivable decrease. lower when accrued expenses decrease.

Answer 65

accrued if attributable to employees' services already rendered. Four conditions are necessary for accrual of employees' compensation for future absences according to provisions in FASB ASC 710-10-25-1. The four conditions are: rights to compensation vest or accumulate, payment of compensation is probable, amount of payment can be reasonably estimated, and the compensation is attributable to employees' services already rendered.

Answer 66

$2,005 Net proceeds of the loan were $194,000 and the effective interest rate was 12.4%. The journal entry to record the December 31, 20X1, accrual of interest would be: Debit Accrued Interest Receivable 2,005 Credit Interest Income 2,005 (12.4% × $194,000 × 1/12) The interest income reflects the effective interest rate applied to the net proceeds received. This is an application of the “effective interest” method.

Answer 67

$200,000 The three stages for internally developed software are the preliminary project stage, the application development stage, and the post-implementation-operation stage. All costs in this stage, including the investigation the feasibility of developing its own software, should be expenses. Costs incurred in the application development stage, including writing the code, are usually capitalized, except for training costs, which are expensed. The company should only capitalize the $200,000 paid to the developers.

Answer 68

$27,200 Cash includes cash in the checking account and the petty cash. Cash equivalents are short-term, highly liquid investments. They must be convertible to known amounts of cash and generally have maturities when purchased of not more than three months. The commercial paper qualifies as a cash equivalent because it is highly liquid and matures within three months of the balance sheet date. The sinking fund would be restricted cash, and the postdated check is still a receivable.

Answer 69

$5,000 A contingent liability must be reported if it is probable that the liability will occur and the amount can be reasonably estimated. Boxes sold 100,000 Estimated redemption percentage x 0.50 Estimated redemptions 50,000 Box tops already redeemed 40,000 Remaining box tops to be redeemed 10,000 Box tops per redemption / 2 Estimated glasses to be provided 5,000 Cost per glass ($2 - $1) $ 1 Estimated liability $ 5,000 This treatment is confirmed in FASB ASC 450-20-25-2(a): "Information available before the financial statements are issued or are available to be issued (as discussed in Section 855-10-25) indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements. Date of the financial statements means the end of the most recent accounting period for which financial statements are being presented. It is implicit in this condition that it must be probable that one or more future events will occur confirming the fact of the loss."

Answer 70

Decrease in both ending inventory and net income In a period of rising prices, changing from FIFO to LIFO will cause ending inventory to decrease because the earlier, lower-cost items will be included. As a result of the lower-ending inventory, cost of goods sold will be higher. (Less-ending inventory will be subtracted from cost of goods available.) The higher cost of goods sold will produce a decrease in net income.

Answer 71

A debit balance of $70,000 Changes in the plan assets and/or projected benefit obligation (PBO) fall into three categories: (1) changes due to unrecognized gains and losses, (2) changes due to prior service cost, and (3) changes associated with a transition asset or obligation. In all three categories, the initial event or occurrence is reflected as a change in the plan asset/PBO with an offsetting change in other comprehensive income; that is, it is not initially included in the determination of pension expense. The amount to be reported in accumulated other comprehensive income is the net gain of $140,000 and the prior service cost of $210,000, for a net debit balance of $70,000.

Answer 72

Amount for required period, $500,000; Aggregate amount for period thereafter, $300,000 The lessee in a lease context must make disclosures as to future required payments under the lease. One must disclose the payments required under the lease for the next 5 years (here that is 5 × $100,000, or $500,000), as well as disclosing the total amounts to be paid thereafter or $300,000 (the 3 remaining years' obligations at $100,000 a year).

Answer 73

Short-term obligations that are paid with cash before the balance sheet is released to the public can be refinanced and reclassified as long term. Short-term obligations intended to be refinanced cannot be reclassified as noncurrent if they are paid with current assets prior to the actual refinancing or a new refinancing agreement being agreed upon. The payment of cash would represent a settlement of the short-term obligation, not a refinancing. All of the other answer choices are correct statements about the refinancing of short-term obligations to be reclassified as noncurrent.

Answer 74

Neither Rose nor Jave As a general rule, the ownership of 20% or more of the voting stock of the investee leads to the presumption that absent evidence to the contrary, the investor has the ability to exercise significant influence over the investee. In this example, we are told that Goll does not have the ability to exercise significant influence. Therefore, the 20% rule is not applied and Goll should not use the equity method for either investment.

Answer 75

Lessee: information about risks associated with residual values Lease obligations and lease costs are generally related to the lessee, while revenues and investments are generally related to the lessor. Information about risks associated with residual values is reported by the lessor, not the lessee, as it affects the overall collectibility of the lease receivable.

Answer 76

$5,550,000 Governments usually prepare their budgets showing estimated revenues and estimated expenditures or appropriations on a basis consistent with financial reporting. This budget includes revenues, increases in the general fund resources not matched by decreases in another fund resources, and also expected interfund transfers. Interfund transfers are recognized in the records as “other financing sources” and result from a movement of resources from one fund to another. Property taxes, licenses and permits, and intergovernmental revenues will all be represented in the budget as “estimated revenues.” The expected transfers in will be represented by “estimated other financing sources” in the budget.

Answer 77

Expenditures Expenditures is a nominal (operating statement) account used in periodically measuring outflows of financial resources, and as such is closed at the end of the fiscal year. Vouchers Payable, Fund Balance, and Fund Balance—Reserved for Encumbrances are all balance sheet (real) accounts. Balance sheet accounts are not closed at fiscal year-end.

Answer 78

sum of the net changes in deferred tax assets and deferred tax liabilities. The basic way that income tax expense is computed is to compute the correct measured values of the deferred tax assets and deferred tax liabilities at the end of the period. When the journal entry is prepared to pay the current income tax due, the necessary adjustments are made to the balances in the accounts of the deferred tax assets and deferred tax liabilities, and the income tax expense is the amount needed to balance that journal entry. Thus, the income tax expense is basically the sum of the changes in those deferred tax asset and liabilities accounts. All deferred tax asset and deferred tax liability accounts are classified on the balance sheet as noncurrent.

Answer 79

$5,000 Other comprehensive income includes items such as gains and losses on foreign currency transactions designated as hedges, gains and losses on derivative instruments, and gains or losses associated with pension or other postretirement benefits. Therefore, for this question the correct answer is $5,000: Deferred gain on an effective cash-flow hedge ($8,000) + Foreign currency translation gain ($2,000) − Prior service cost not recognized in net periodic pension cost ($5,000) = $5,000

Answer 80

$20,000 FASB ASC 715-30-55-95 prescribes the amortization of prior service pension cost over the remaining service period of the employees for whom such costs are incurred. The method used when employees have varying service periods includes the calculation of the weighted-average service period. This method, similar to sum-of-the-years'-digits depreciation, results in a declining amortization expense over the expected service period. The fraction that represents the annual amortization rate has a numerator equal to the current year's equivalent years of service and a denominator equal to the total future service years for all employees. In this case, amortization of prior service cost would be calculated as follows: Future Service Year Employees Years 1 2 3 4 5 6 7 A 3 1 1 1 B 5 1 1 1 1 1 C 5 1 1 1 1 1 D 7 1 1 1 1 1 1 1 20 4 4 4 3 3 1 1 The total number of Future Service Years is 20; the total number in the first year is 4. Year 1 amortized prior service cost is 4/20 × $100,000 = $20,000.

Answer 81

accounts receivable. Since the agreement stipulates that Jel may deduct the freight costs from Jel's payment to Dale, the freight charges will be an expense (payable) to Dale. Until the payment for the goods is made, Jel should include the amount paid for freight in Jel's accounts receivable.

Answer 82

$81 Fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability. If there is no principal market, the entity should use the most advantageous market for that asset or liability. The FASB defines the most advantageous market as “the market that maximizes the amount that would be received to sell the asset or minimizes the amount that would be paid to transfer the liability, after taking into account transaction costs and transportation costs” (FASB ASC 820-10-20). The price used to measure fair value should not be adjusted for transaction costs, which are the incremental direct costs to sell the asset or transfer the liability. In other words, in determining the most advantageous market, adjust for transaction costs. But to compute the actual fair value amount, ignore the transaction costs. The first market yields $76 and the second market yields $80, so the second market is the most advantageous. The fair value in the second market is $81 ($80 with the $1 added back).

Answer 83

$41,000 Hake would record $41,000 for the foreign currency translation adjustment on December 31, 20X1. Calculated as follows: Foreign Applicable Currency Exchange Amounts Rates Dollars Net assets at January 2, 20X1 (date of purchase) 720,000 $.45 $324,000 Net income, 20X1 250,000 .42 105,000 Net assets at December 31, 20X1 970,000 $429,000 ======= ======== Net assets at December 31, 20X1 970,000 .40 $388,000 ======= ======== Net Assets 12/31/X1 (original exchange rates) $429,000 Less Net Assets 12/31/X1 (present exchange rate) 388,000 Foreign Currency Adjustment $ 41,000

Answer 84

Fund balance Fiduciary funds use the economic resource measurement focus and the accrual basis of accounting. Revenues and expenses are not reported. The difference between assets plus deferred outflows and liabilities plus deferred inflows is referred to as “net position.” A change in net position is calculated as the difference between additions and deductions. Fiduciary funds do not report fund balance.

Answer 85

$345,300 Income was understated in the previous year because the full insurance premium was recorded as expense, leading to an understatement in beginning retained earnings the next year. The beginning retained earnings balance should reflect the after-tax effect of only half of the insurance premium because the premium covered two years. Nect should report adjusted beginning retained earnings of $345,300: Beginning retained earnings as originally reported $330,000 Overstated expense of $51,000/2 – Tax of 40% ($10,200) 15,300 Corrected beginning retained earnings $345,300

Answer 86

$60,000 To solve this problem, work backwards. If net income after the bonus and the taxes was $360,000, then (taking the tax expense back first) income before taxes was $600,000 (using the after-tax back to pre-tax conversion formula, $360,000 ÷ 0.6 = $600,000, 0.6 = 1 less the tax rate of 40%). Now, the bonus is equal to 10% of the income after deducting the bonus, which would be the income before taxes of $600,000. Thus the bonus is 0.10 × $600,000, or $60,000.

Answer 87

$0 Contributions of services are recognized as revenues if they “create or enhance nonfinancial assets” or “require specialized skills” that would need to be purchased if not donated. Specialized skills are possessed by trained and often licensed or certified professionals. Turtle feeding does not require such specialized training or skills, and would not be paid for if Chris did not donate his time. Therefore, no revenue is recognized for Chris's volunteered time.

Answer 88

have no effect. FASB ASC 230-10-20 focuses on cash and cash equivalents. The following explanation is offered: "Examples of items commonly considered to be cash equivalents are Treasury bills, commercial paper, money market funds, and federal funds sold (for an enterprise with banking operations)." Thus, the purchase of U.S. Treasury bills would have no effect on the statement of cash flows.

Answer 89

Costs of start-up activities, including organization costs, should be expensed as incurred. An asset can be recorded only when the business is certain that it will derive a benefit from the expenditure. Certain expenditures for research and development, advertising, training, start-up and pre-operating activities, relocation or rearrangement, and goodwill are examples of the kinds of items for which assessments of future economic benefits may be especially uncertain. Consequently, expenditures for start-up costs should be expensed as incurred.

Answer 90

Flows and balances of financial resources According to the summary of GASB Concept Statement 1, the primary characteristics of governmental structure are as follows: "(1) The representative form of government and the separation of powers "(2) The federal system of government and the prevalence of intergovernmental revenues "(3) The relationship of taxpayers to services received "These are the primary characteristics that affect financial reporting of governmental-type activities and must be considered in establishing financial reporting objectives."

Answer 91

Net gain of $10,500 Investments in equity securities are recognized on the balance sheet at fair value. Unrealized holding gains and losses are included in earnings. Realized gains and losses are also included in earnings. Gain on sale of the first securities was $104,500 − $92,000 $12,500 Unrealized loss of the second securities was $73,000 − $71,000 (2,000) Net gain on income statement $10,500

Answer 92

noncurrent liability. Temporary differences that will add to taxable income relate to future taxable amounts. Future taxable amounts are associated with deferred tax liabilities. All deferred tax assets and liabilities are classified as noncurrent.

Answer 93

$182,000 Current liabilities are those obligations that will be settled by the use of current assets. The items in the list that will be settled by the use of current assets (cash) are accounts payable, 6% bonds payable, payroll liabilities, and accrued vacation liabilities, for a total of $182,000 ($31,000 + $126,000 + $11,000 + $14,000). The notes payable are not due until 20X9, and the unearned revenue will not be earned until 20X8. Even though the 4% bonds are due within the next year, they are not included in current liabilities because the related bond sinking is classified as a noncurrent asset. The 4% bonds classification in the balance sheet needs to be the same (current vs. noncurrent) as the bond sinking fund.

Answer 94

directly on the combining statements, on divider pages or in a separate section. Narrative explanations of combining and individual fund statements should be presented on divider pages, directly on the statements and schedules, or in a separate section according to GASB 2200.211. Notes to the financial statements, RSI, or MD&A are not options for locating these narratives.

Answer 95

$100 The intrinsic method is the excess of the market price over the exercise price. ``` Market price (100 x $10) $1,000 Exercise price (100 x $9) 900 Intrinsic value $ 100 ```

Answer 96

Using fair value at the date of the financial statements The equity portfolio should be valued in the college's year-end financial statements three years after the donation at fair value at the date of the statements. Donated equity securities with readily determinable market values are reported at market value; the length of the holding period is irrelevant.

Answer 97

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. Investment gains and losses are reported as unrestricted revenues in the statement of activities unless the donor of the principal investment amount has explicitly instructed otherwise. The statement of activities is focused on clarifying whether revenues are unrestricted or restricted so gains may or may not be netted for presentation, and gains may or may not be reported net of expenses.

Answer 98

Included in the expense category in the determination of income Taxable income is an amount resulting from the application of tax rules governing revenues and expenses. Some revenues/expenses are specifically excluded or subjected to limitation(s). When determining net income using the income-tax basis, a fair determination necessitates using the nondeductible (for taxes) portion of expenses (such as meals and entertainment) as long as they are legitimate business expenses.

Answer 99

Equipment and facilities included in estimated total current cost of closure and post-closure care should not be reported as capital assets. Equipment and facilities included in the estimated total current cost of closure and post-closure care should not be reported as capital assets. Equipment, facilities, services, and final cover, included in the estimated total current cost, should be reported as a reduction of the accrued liability for landfill closure and post-closure care, when they are acquired.

Answer 100

Accrue contingent liability: $0 Disclose contingent liability: $100,000–$150,000 For a loss contingency to be accrued as a loss in the financial statements, the probability of occurrence must be probable and the amount of loss at least reasonably estimable. For disclosure, the probability of occurrence must be at least reasonably possible. Because the loss is only reasonably possible, no loss is accrued. The company must still disclose the risk of loss in the notes to the financial statements and describe the range of loss.

Answer 101

As restricted support of the present value of $10,000 Contribution revenues (support) from gifts, grants, bequests, and so on are reported in the period they are unconditionally promised or received, whichever is earlier. Revenues are measured at the present value (or net realizable value for any contributions expected to be received within a year after the unconditional promise was made); recognition of contribution revenues is not deferred because donations are restricted. The pledge is classified as restricted since it will be satisfied by expending resources for the restricted purpose (i.e., building the addition to the kennel).

Answer 102

A gain of $30,000 Under IFRS (International Financial Reporting Standards), a foreign currency transaction should be recorded initially at the rate of exchange at the date of the transaction. At each subsequent balance sheet date, and at settlement, the transaction should be adjusted for the current amount, with differences being reported in profit or loss in the period incurred. At 11/1, the liability was $300,000 (€200,000 × 1.5), and on 12/31, the liability had decreased to $270,000 (€200,000 × 1.35), for a gain of $30,000.

Answer 103

sell one of its successful and well-known product brands. Management must evaluate whether there are conditions and events, considered in the aggregate, that raise substantial doubt about an entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. Management's plans to deal with the current situation could mitigate the adverse effects and often involve plans to increase cash inflows. Examples of these plans would be: plans to dispose of assets, plans to borrow money or restructure debt, plans to reduce or delay expenditures, or plans to increase ownership equity. If management planned to sell one of its successful and well-known product brands, the proceeds from the sale could be used to mitigate the adverse conditions it had been experiencing. This situation may alleviate some of the financial pressure. The purchase of a substantial equity stake in a key supplier would involve an outlay of cash and will increase financial pressure on the entity. The same is true for increasing dividend payments to stockholders and increasing cash outlays for research and development costs. None of these options would be a positive move for a company with a going concern issue

Answer 104

$1,075,000 Derived tax revenues are reported when the underlying transaction has occurred, and for the modified accrual method of accounting, when the resource is considered to be available. At the fund level, the General Fund computes revenues using the modified accrual method. Furthermore, governmental entities report revenues net of any allowance for doubtful accounts. A total of $100,000 of the beginning receivable had been deferred and $50,000 was classified as doubtful. Therefore, the balance ($300,000) would have been previously recognized as revenue of a prior period. When you subtract the $300,000 of prior-year revenues from current-year receipts ($1,250,000) and add to it that portion of the ending receivable considered to be available at year-end ($125,000) you have revenues for the current year equal to $1,075,000. Beginning receivables $450,000 Beginning deferred reven (100,000) $350,000 Beginning doubtful accounts (50,000) Prior-year revenues $300,000 ========= Current-year receipts $1,250,000 Prior-year revenue 300,000 $950,000 Available at end of year 125,000 Current-year revenue $1,075,000 ==========

Answer 105

The gain or loss, along with the offsetting loss or gain attributable to the hedged risk, should be recognized currently in earnings in the same accounting period. The FASB requires that the following be recognized for fair value hedges: Changes in the fair value of the fair value hedge Changes in the fair value of the item being hedged Note that the concept of “extraordinary” items has been eliminated from GAAP; the presentation for items that are unusual in nature or occur infrequently will be expanded to include items that are both unusual in nature and infrequently occurring.

Answer 106

$1,710,000 Goods shipped FOB shipping point in transit at the end of the period are considered the buyer's and should be included on the buyer's records. The goods in the shipping area were not in transit and therefore should be included in inventory. Inventory on December 31, 20X1, per physical count $1,500,000 Unrecorded purchase (in transit) 90,000 Goods not "sold" on December 31, 20X1 (not shipped) 120,000 Adjusted inventory on December 31, 20X1 $1,710,000

Answer 107

$10,000 Other comprehensive income includes foreign currency translation adjustments and unrealized holding gains or losses on available-for-sale debt securities. The change in accounting principle is an adjustment to retained earnings. The increase in common stock is not reflected in the income statement. Net income $11,000 Unrealized loss on available-for-sale debt securities (3,000) Foreign currency translation adjustment 2,000 Comprehensive income $10,000

Answer 108

face value of the bonds at the beginning of the period by the contractual interest rate. Whether the bond is issued at a premium or discount or at par, the interest payable (in cash) is calculated the same way: face value (principal) of the bonds times coupon (contractual interest rate). The same is true for the straight-line method as well. Interest expense for the period is the carrying value times the effective rate. Multiplying the face value of the bonds at the beginning of the period by the effective interest rates, or multiplying the carrying value of the bonds at the beginning of the period by the contractual interest rate have no accounting use per se.

Answer 109

Direct method GASB 2450.128 clarifies that, for proprietary funds, a statement of cash flows should be presented using the direct method. This contrasts with practice in not-for-profit and for-profit entities that follow FASB guidance allowing the use of either the indirect or the direct method. Thus, the other answer choices would not apply to the enterprise fund of a government.

Answer 110

$90,000 Under FASB ASC 958-605-25-2, not-for-profit entities must record unconditional promises to give as contributions revenue when the promise is made. Under FASB ASC 958-605-30-6, such contributions may be recorded at net realizable value, or net of any allowance for uncollectible pledges.

Answer 111

$174,000 East Corp.'s net periodic pension cost for 20X1 is $174,000, as shown below: Service cost $150,000 Interest cost 0 Amortization of past service cost 24,000 Expected return on plan assets 0 Amortization of unrecognized gain/loss 0 $174,000 ======== The interest cost is computed by applying the appropriate rate times the projected benefit obligation (PBO) at January 1, 20X1. Since this is the first year of the plan, the PBO at January 1, 20X1, is $0, which means that the interest cost for 20X1 is $0. The expected return on the plan assets is computed by applying the appropriate rate times the fair value of the plan assets (PA) at January 1, 20X1. Since this is the first year of the plan, the PA at January 1, 20X1, is $0, which means that the expected return on plan assets for 20X1 is $0. Since no amortization of unrecognized gain/loss is necessary (which is stated in the facts), the net periodic pension cost consists of the service cost and the amortization of past service costs. Service cost is shown as a component of compensation expense on the income statement; amortization of past service cost would be under pension cost.

Answer 112

$93,000 The entry to accomplish all of these changes at one time would include an increase to prepaid expenses with a $5,000 debit, and a $100,000 debit to operating expenses. One of the credits would be needed to increase the accrued liabilities by $12,000 and the other remaining credit to finish the entry would be to cash for $5,000 + $100,000 − $12,000, or $93,000.

Answer 113

Milton will retain control of the receivables. Under a pledge, an account receivable is used as collateral for a loan. Milton continues to collect the receivables and applies the collection to the loan balance.

Answer 114

Capitalize the asset retirement cost at its undiscounted cash flow value. An asset retirement obligation (ARO) refers to an obligation associated with the retirement of a tangible, long-lived asset, such as a nuclear power plant. An entity should recognize the fair value of an ARO in the period in which it is incurred if a reasonable estimate of fair value can be made. Otherwise, the liability should be recognized in the first period in which a reasonable estimate of fair value can be made. When an ARO is initially recognized, an entity should capitalize the ARO cost by increasing the carrying amount of the related long-lived asset by the same amount as the ARO. Subsequently, the entity should amortize the ARO to expense using a systematic and rational method over its useful life. An entity should not capitalize the ARO at its undiscounted cash flow value.

Answer 115

By type of tax in general revenues All taxes of the reporting government, even if restricted to a specific program, are general revenues. The format of the government-wide statement of activities should be viewed as having two distinct parts. The upper portion of the statement focuses on cost of services and reports both the total expenses and the net revenues or net expenses of the government by function. The lower portion of the statement intends to report how the net program expenses incurred during the year compare with general revenues. The statement is not intended to report net income, and no net income number is presented.

Answer 116

Gross Profit Operating income is a subtotal well before income tax expense. Income tax expenses during the period are specifically allocated to the other three answer choices (discontinued operations, income from continuing operations, and prior-period adjustments). The following items are subject to the application of intraperiod income tax allocation: Discontinued operations Cumulative effects of accounting changes Prior-period adjustments Direct adjustments to capital accounts

Answer 117

$59,000 Baker has earned the initial franchise fee and there is no indication that collectibility of the receivable is not reasonably assured. Therefore, Baker should recognize all the revenue for the initial franchise fee. The amount to be recognized is the cash received ($25,000) plus the present value of the future payments ($34,000). The difference between the $40,000 of future payments and their present value will be recognized as interest revenue over the 4-year period.

Answer 118

either IFRS or U.S. GAAP. For a sale/leaseback transaction accounted for under U.S. GAAP, the seller-lessee measures the right-of-use asset at the present value of the lease payments; a gain or loss is recognized for the difference between the sale proceeds and the carrying amount of the underlying asset. Under IFRS (International Financial Reporting Standards), the seller-lessee measures the right-of-use asset at the retained portion of the previous carrying amount of the underlying asset (i.e., at cost); only the amount of any gain or loss related to the rights transferred to the buyer-lessor is recognized.

Answer 119

$14,250 Gum should report $14,250: Estimated warranty expense (20X1 sales) = .06 × $150,000 = $ 9,000 Estimated warranty expense (20X2 sales) = .06 × $250,000 = 15,000 Total estimated warranty expense $24,000 Less actual warranty expenditures 9,750 Estimated warranty liability on December 31, 20X2 $14,250

Answer 120

Government-wide statement of net position The noncurrent portion of general government leases is reported as a general long-term liability. General long-term liabilities should be reported in the governmental activities column of the government-wide statement of net position. They should not be reported as liabilities in governmental funds.

Answer 121

$63,000 The remaining unamortized cost of any asset that is totally impaired is a loss. Cost of patent $90,000 Patent amortization for 20X1 through 20X3 (($90,000 / 10 years) x 3 years) 27,000 Carrying value of patent on 01/01/X4 (amount written off in 20X4) $63,000 ======= Remember: Since amortization is recorded at the end of each year, no amortization for 20X4 has been recorded before 12/31/X4. The objective at the end of 20X4 is to write off all remaining investment since the product was withdrawn from sale.

Answer 122

fair value. The statement of net assets of a pension plan must include net assets reflecting all investments at fair value.

Answer 123

Enterprise An enterprise fund must be used to report any activity for which a fee is charged to external users for goods or services and the pricing of the good or service is designed to cover the expenses of operating the service. The revenues generated by the electrical power delivered to the customers is designed to offset all expenses, requiring enterprise fund classification of the land associated with the operation of the windmills. Permanent funds restrict part of the fund resources from use. There is no such stipulation for the city. Special revenue funds use their funds for a specific purpose (i.e., building a library). Capital project funds are used to account for financial resources restricted, committed, or assigned to specific capital outlays. There is no mention of purchasing additional capital resources in this problem.

Answer 124

$40,000 State University would report the full amount of the pledges as revenue because the availability criterion does not apply. The Statement of Activities is a government-wide statement using the full accrual basis of accounting. The contributions are restricted to scholarships but this purpose restriction by the donor is not a condition that must be met before the donation is made. It does not function like an “expenditure driven” government grant (the recipient must incur allowable costs before it recognizes any grant revenue).

Answer 125

Cash Budgetary comparisons must be presented on the same basis of accounting as the adopted budget. For this question, the preparation of the budget is on the cash basis, so budgetary comparisons will be prepared on the cash basis. Budgetary comparison schedules should be accompanied by information (either in a separate schedule or in notes to required supplementary information (RSI)) that reconciles budgetary information to GAAP information.

Answer 126

The statement of financial position Other comprehensive is transferred to accumulated other comprehensive income each period. Accumulated other comprehensive income is reported as part of equity on the balance sheet/statement of financial position.

Answer 127

Administrative costs "Research" is defined by the FASB as a planned search or critical investigation aimed at the discovery of new knowledge with the hope that such knowledge will be useful in developing a new product or service, developing a new process or technique, or bringing about a significant improvement to an existing product or process. "Development" is the translation of research findings or other knowledge into a plan or design for a new product or process or for a significant improvement to an existing product or process whether intended for sale or use. Administrative costs are not considered to be research and development (R&D) costs. R&D costs can be classified into five categories: Materials, equipment, and facilities used in R&D activities Personnel engaged in R&D activities Intangibles purchased or developed for use in R&D activities Contract services acquired and used in conjunction with R&D activities Indirect costs reasonably allocable to R&D activities

Answer 128

$360,000 Retained earnings on December 31, 20X1 $300,000 Add: 20X2 net income 60,000 Retained earnings on December 31, 20X2 $360,000 Note: The re-issuance of the 5,000 shares of treasury stock at $5 more per share than acquisition cost ($25 sales price − $20 acquisition cost) resulted in a credit to additional paid-in capital. Retained earnings were not affected. The journal entry to record the reissuance would be as follows: Dr. Cash 25,000 ($25 sales price × 1,000 shares) Cr. Treasury Stock 20,000 ($20 original cost × 1,000 shares) Cr. PIC—Treasury Stock 5,000 ($5 excess × 1,000 shares) This transaction does not affect retained earnings. The only way retained earnings would be affected is if the company sold more treasury stock for more than $5,000 below its original cost. In that case, $5,000 would come out of PIC—Treasury Stock with a debit, and any excess would be debited to Retained Earnings.

Answer 129

Reserve for encumberances Issuing purchase orders and contracts represents commitment of a certain amount of the appropriation for the fiscal year. The commitment is formally recorded by debiting the “encumbrances” budgetary account and crediting the “reserve for encumbrances” or “Fund balance—reserved for encumbrances” budgetary account. The debit-balance encumbrances account can be used in a report as contra to the credit-balance appropriations account so as to reduce the balance of the appropriation for operational control. In essence, encumbrances “hold the place” of expenditures that are in process but will not be recorded until the liability is formally recognized upon receipt of goods or services.

Answer 130

Liability: $1,600 Expense: $2,800 Companies must recognize compensation expense for their employees in the period when the expense was earned by the employee, regardless of when the vacation was actually taken. Elan Co. would recognize expense of $2,800 ([$600 × 2] + [$800 × 2]). The liability would be recognized for the two weeks not taken by the employees and is owed in future years for $1,600 ($800 × 2).

Answer 131

$468,750 The statement of net assets available for benefits of the plan must include the change in fair value of each significant type of investment, investment income (including dividends and interest received), contributions from employers, contributions from participants, contributions from other identified sources, benefits paid to participants, payments to insurance entities, and administrative expenses. Total additions represent changes to the statement of net assets available for benefits that increase net assets, or $468,750, computed as follows: Dividends and interest received $ 92,000 Contributions received from employers and employees 340,000 Increase in fair value of investments at year-end 36,750 $468,750* * Administrative expenses are not additions to the plan as they reduce net assets. Investments purchased do not affect additions to net assets because they are merely a transfer from one asset (often cash) to another asset (investments). Therefore, net assets remain unchanged.

Answer 132

1.33 To determine the ending inventory using dollar-value LIFO, a separate price index is used for each year of inventory. Under dollar-value LIFO, the price index for the 20X1 inventory layer is determined by dividing the 20X1 inventory layer at the current (end of the year) cost of $200,000 by the inventory at the base-year cost of $150,000. The price index used was 1.33 (rounded).

Answer 133

The Building Authority is a component unit and will be reported as blended with the city's funds. The Authority is a component unit of the city. The Authority's governing body is appointed by the city and the lease constitutes the imposition of a financial burden on the city. A component unit should be included in the reporting entity or primary government's financial statements using the blending method if the component unit's governing body is the same as the primary government; if the component unit provides services entirely or almost entirely to the primary government; or if the component unit's debt is expected to be repaid with resources provided by the primary government even if provided through a lease arrangement. The Authority will be reported using the blending method because the Authority provides services entirely to the city and its debt will be repaid with city resources over time. Only one of the three criteria needs to be met for the blending method to be used. In this case, two of the three criteria were met.

Answer 134

cost-benefit. SFAC 8, chapter 3, paragraph QC5, identifies two fundamental qualitative characteristics—relevance and faithful representation. SFAC 8, chapter 3, paragraph QC19, identifies four enhancing characteristics—comparability, verifiability, timeliness, and understandability. In SFAC 8, chapter 3, paragraph QC35, the requirement that benefits exceed costs was identified as a pervasive constraint. Costs are imposed when reporting financial information, and those costs must be justified. The FASB was clearly concerned about the cost-benefit constraint.

Answer 135

The gain or loss, along with the offsetting loss or gain attributable to the hedged risk, should be recognized currently in earnings in the same accounting period. The FASB requires that the following be recognized for fair value hedges: Changes in the fair value of the fair value hedge Changes in the fair value of the item being hedged Note that the concept of “extraordinary” items has been eliminated from GAAP; the presentation for items that are unusual in nature or occur infrequently will be expanded to include items that are both unusual in nature and infrequently occurring.

Answer 136

$20,000 For Project 1: Percentage Completed = 20X1 costs / Estimated total costs = $240,000 / ($240,000 + $120,000) = 2/3 Contract price recognized in 20X1 (2/3 x $420,000) $280,000 Less 20X1 cost incurred 240,000 Gross profit from Project 1 $ 40,000 For Project 2: Contract price $300,000 Less actual and estimated costs to complete ($280,000 + $40,000) 320,000 Estimated loss (20,000) Pell's total 20X1 gross profit (loss) under percentage-of-completio $ 20,000 ======== Because Project 2 reflects an anticipated loss, the entire amount of the loss (not the percent completion of loss) must be recognized in accordance with the conservatism principle.

Answer 137

decreases net assets without donor restrictions. Management and general expenses are reported in a separate functional classification from program expenses. They are shown as expenses and not as an offset to revenues. All expenses in the statement of activities are classified as changes in net assets without donor restrictions.

Answer 138

$900,000 Because the governmental funds have the measurement focus of current financial resources, all three disbursements ($900,000) would be reported as expenditures. Because governmental funds do not account for noncurrent assets or liabilities, the purchase of equipment ($300,000) and the payment of principal on long-term debt ($100,000) are fund expenditures, as well as the payments to vendors ($500,000)

Answer 139

Government-wide statement of net position The noncurrent portion of general government leases is reported as a general long-term liability. General long-term liabilities should be reported in the governmental activities column of the government-wide statement of net position. They should not be reported as liabilities in governmental funds.

Answer 140

$487,695 This is a question involving the amortization of a loan: with two payments made, what is the remaining payable carrying value? Beginning principal of $500,000 × 0.12 (Interest rate) × 1/12 (because they are monthly payments) for only one month’s interest = $5,000. The principal amortized from the first payment is thus the payment amount less the $5,000 interest, or $11,122 – $5,000 = $6,122. The interest on the second payment is $500,000 less $6,122 for the principal of $493,878, × 0.12 × 1/12 (as before, covering one month) for a total interest charge of $4,939. Thus, the remaining principal balance on December 31 is the principal after the first payment of $493,878 less the principal paid with the second payment (after interest, $11,122 – $4,939) of $6,183, thus $493,878 – $6,183 = $487,695.

Answer 141

Income from continuing operations The unrealized holding gain or loss on investment in equity securities is always included in income from continuing operations.

Answer 142

I and II GASB 2200.140 states that all revenues are general revenues unless they are required to be reported as program revenues. All taxes, even those levied for a specific purpose, are general revenues. Program revenues consist of charges for services and program-specific grants and contributions.

Answer 143

deducted in determining the net income of the combined corporation for the period in which the costs were incurred. Business combinations accounted for as an acquisition should treat expenses related to the combination as follows: Out-of-pocket costs such as fees of finders and consultants are expensed. Issuance costs such as SEC filing fees are charged to the paid-in-capital account. FASB ASC 805-10-25-23 states the following: "Acquisition-related costs are costs the acquirer incurs to effect a business combination. Those costs include finder's fees; advisory, legal, accounting, valuation, and other professional or consulting fees; general administrative costs, including the costs of maintaining an internal acquisitions department; and costs of registering and issuing debt and equity securities. The acquirer shall account for acquisition-related costs as expenses in the periods in which the costs are incurred and the services are received, with one exception. The costs to issue debt or equity securities shall be recognized in accordance with other applicable GAAP."

Answer 144

Bond carrying amount: No effect Retained earnings: No effect The choice of method to amortize a bond premium or discount affects the timing of the interest expense but does not affect the total expense or premium amortized over the bond’s maturity. Over the maturity period of the bond, the premium or discount will be amortized to zero. At the bond’s maturity on June 30, year 12, the bond premium will have been amortized to zero under both methods and the full premium recognized in interest expense and closed to retained earnings. The timing of the expense would differ, but the total impact to retained earnings and carrying value at the bond’s maturity would be identical (ignoring income taxes).

Answer 145

a component of income from continuing operations, but not net of applicable income taxes. These items should be included in the computation of net income from continuing operations prior to income tax expense.

Answer 146

Governmental funds In governmental funds, interfund transfers should be reported as “other financing uses” in the fund making the transfer and as “other financing sources” in the fund receiving the transfer. In proprietary funds, which use full accrual accounting, transfers should be reported separately after nonoperating revenues and expenses. “Other financing sources and uses” is not an appropriate category for proprietary funds.

Answer 147

$19,000 Since the cash surrender value of a life insurance policy is an asset, then the insurance expense is only the premium less the increase in the asset (surrender value). Annual advance premium payment $40,000 Less increase in cash surrender value ($108,000 - $87,000) 21,000 Life insurance expense for 20X6 $19,000 ======= Note: The increase in cash surrender value is deducted because cash surrender value of the insurance policy is an asset. Also, the increase in this asset already includes the effect of the $6,000 in dividends applied to it in 20X6.

Answer 148

Option (Futures Contract) 120,000 Unrealized holding gain--equity 120,000 Since the price of crude oil has fallen, the value of the futures contract (the derivative) increased in value. Since the contract was a 6-month contract, it expires on June 30, 20X6, and has a fair value just before it expires of $120,000 (($60 per barrel future − $54 per current barrel) × 20,000 barrels). That $120,000 increase in fair value of the derivative results in a debit to the Futures Contract account (an asset) of $120,000 and a credit to unrealized gain of $120,000. Since the futures contract serves as a hedge of an “anticipated” transaction (the probable sale of 20,000 barrels of crude oil on July 1, 20X6), if it satisfies all other conditions for a hedge, the derivative represents a cash flow hedge rather than a fair value hedge. Accordingly, the unrealized gain of $120,000 would be included in other comprehensive income rather than in net income.

Answer 149

Deferred Rent Revenue Handy Dandy would make the following journal entry on March 1, Year 5: Cash 20,000 Deferred Revenue 20,000

Answer 150

$0 The cruise ship qualifies for interest capitalization. Qualifying assets, per FASB ASC 835-20-15-5, include “assets that are constructed or otherwise produced for an entity's own use (including assets constructed or produced for the entity by others for which deposits or progress payments have been made).” The down payment means that the weighted-average accumulated expenditures each year will be at least $3,000,000. Therefore, all of the interest on the note is capitalized during each year of construction. No interest expense related to the note should be reported in the income statement during the construction period.

Answer 151

A distinction between governmental and business-type activities The government-wide financial statements report governmental activities, business-type activities, the primary government totals, and discretely presented component units. All data in the government-wide statements are presented on the accrual (revenue and expense) basis and use the economic resources measurement focus. Fiduciary funds and fiduciary component units are not included in these statements. Governmental activities and business-type activities are reported separately.

Answer 152

Describe the nature of the contract in a note to the financial statements, recognize a loss in the income statement, and recognize a liability for the accrued loss Expenses are generally recognized when an enterprise's economic benefits are consumed in revenue-earning activities or otherwise. Expenses or losses are recognized if it becomes evident that previously recognized future economic benefits of assets have been reduced or eliminated, or that liabilities have been incurred or increased, without associated economic benefits. In this case, a loss is recognized because it has become evident that previously recognized future economic benefits of assets have been reduced without any associated economic benefits.

Answer 153

historical cost. Financial accounting is primarily based on the historical cost principle which specifies that assets be recorded and carried at their historical acquisition cost. When reporting inventory at the lower of cost or market, cost is compared with market (usually some variant of replacement cost) and the lower value is used to reflect the loss of utility (i.e., market value) of the goods. Selection and use of a value other than acquisition cost is clearly a departure from the historical cost principle. Inventory measured using the FIFO or average cost method is measured at the lower of cost and net realizable value (NRV), which is defined to be the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. If the NRV of inventory is lower than its cost, the difference is recognized as a loss in earnings in the period in which it occurs.

Answer 154

Prepaid insurance: $7,000; Insurance expense: $500 This question indicates that on Roro's unadjusted trial balance the full 3-year premium of $7,200 for the renewal of the policy has been expensed. The prepaid insurance account still contains $300 of unamortized premiums from the old policy. The accountant must make adjusting entries to achieve the following: Expense the remaining premium of the old policy (DR Insurance Expense 300; CR Prepaid Insurance 300). Transfer the premium for the new policy to the prepaid insurance account (DR Prepaid Insurance 7,200; CR Insurance Expense 7,200). Amortize one month of expense on the new policy (DR Insurance Expense 200; CR Prepaid Insurance 200). Calculation of account balances: Monthly amortization = Policy cost / 36 months = $7,200 / 36 = $200 / month Prepaid insurance Policy 1-month balance on 3/31/X1 = cost - amortization = $7,200 - $200 = $7,000 ====== ``` Insurance expense on 3/31/X1: Amortization of prior policy $300 March amortization of renewal 200 Total expense on 3/31/X1 $500 ==== ```

Answer 155

Asset and liability approach The FASB determines income tax expense by requiring an asset and liability approach to the expense. This method recognizes that tax expense is the result of current-year activities and preceding-year activities. This method focuses on the calculation of and change in deferred tax assets and liabilities, current income tax payable, and valuation allowances, and calculates the periodic expense or benefit as the change in the asset or liability from the prior balance sheet date. Note that all deferred tax assets and liabilities are classified as long term on the balance sheet.

Answer 156

Net assets without donor restrictions $0, net assets with donor restrictions $2,500 The donation was earmarked for a specific purpose. As of the date of the statement of financial position for 20X3, the unspent donation amounted to $2,500 that would be reflected in net assets with donor restrictions. The 20X3 supplies purchase and use of supplies would be reported in the statement of activities as both an increase at the time of purchase (reclassification from net assets with donor restrictions to net assets without donor restrictions) and a decrease (expense) at the time of use with a zero net effect on net assets without donor restrictions by the end of 20X3.

Answer 157

$16,000 Even though the bonds have only been outstanding for two months (November and December) by the end of the year, nevertheless, the bonds pay interest on October and, in this case, owe the interest to be paid starting to accrue from October (the interest payment date). Thus, the interest payable up until the end of December for the year is based on the face amount ($800,000), the stated interest rate (8%), and the time from the October 1 payment date until the end of December. Thus, the interest payable at the end of the year is $16,000: $800,000 × 0.08 × 3/12 = $16,000

Answer 158

$7,000 IFRS requires component depreciation to be applied; each separable part of an asset has its own depreciation rates, as follows: Estimated Annual Component Cost Life Depreciation Engine $ 25,000 10 $2,500 Seats 10,000 8 1,250 Remainder 65,000 20 3,250 Total $100,000 $7,000

Answer 159

Foreign currency translation gains Foreign currency remeasurement gains and losses are reported in the income statement, as are foreign currency transaction gains and losses. Foreign currency translation gains and losses are reported in other comprehensive income.

Answer 160

a debit to the carrying value of the related asset. While a company records the legal liability (a credit), it also records the same amount as an increase (a debit) in the carrying value of the related asset.

Answer 161

$500,000 At the balance sheet date, goods in transit that were shipped FOB shipping point should be included in the inventory of the buyer; goods in transit shipped FOB destination should be included in the inventory of the seller. Goods out on consignment should be included in the inventory of the consignor. Goods in on consignment should not be included in the consignee’s ending inventory. Therefore, neither of the items listed requires an adjustment to the reported ending inventory balance; Delar’s ending inventory is just the $500,000.

Answer 162

Unadjusted quoted prices for identical assets or liabilities in active markets The FASB’s fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels, as follows: Level 1 inputs—quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date Level 2 inputs—inputs other than quoted prices included within Level 1 that are observable for similar assets or liabilities, either directly or indirectly Level 3 inputs—unobservable inputs for the asset or liability

Answer 163

report information about the overall government without displaying individual funds or fund types. The government-wide financial statements consist of a statement of net position and a statement of activities. Those statements should “report information about the overall government without displaying individual funds or fund types” (GASB 2200.110). The statements should be prepared using the accrual basis of accounting and distinguish between governmental and business-type activities. Information about fiduciary funds should not be included in the statements.

Answer 164

$20,000 Baker should report $20,000 as net cash provided by operating activities: Net income $78,000 Adjustments Increase in accounts receivable ($82,000) Increase in accounts payable 24,000 (58,000) Net cash provided by operating activities $20,000

Answer 165

$54,000. Deferred tax assets are measured by the total temporary differences multiplied by the tax rates in effect when the tax differences unwind. The loss carryforward is recognized as a deferred tax asset at the total future deductible amount multiplied by the future tax rate that will be available for the later tax deductions. All deferred tax liabilities and deferred tax assets are classified on the balance sheet as noncurrent. Thus, the deferred tax asset is a tax benefit (lowering of this year’s income tax expense) and will increase net income by the total amount of the expected benefit amount of $54,000 ($180,000 deduction × 0.30 (the future tax rate of 30%)). The other gain is not recognized until the sale is finalized and agreed to by both parties.

Answer 166

$11,666 For qualifying assets, the interest cost incurred during the period of construction of an asset is a part of the historical cost of acquiring the asset. In general, the capitalization rate shall be a weighted average of the rates applicable to borrowings (debt) outstanding during the accounting period for which the capitalizable interest is being calculated. Cumulative CWIP # of Months Capitalized Balance Interest Rate Outstanding Interest $ 500,000 5% 1/12 $ 2,083 800,000 5% 1/12 3,333 1,500,000 5% 1/12 6,250 TOTAL $11,666

Answer 167

Disclosed: $2,000,000 loss and $1,000,000 gain; Accrued: $1,500,000 loss Contingent losses are accrued when probable and reasonably estimable. Contingent losses are disclosed when probable or reasonably probable. Contingent gains are not accrued but should be disclosed when probable or reasonably probable. Only the reasonably probable loss should be accrued ($1,500,000). All of the gains and losses should be disclosed (Losses: $1,500,000 + $500,000 = $2,000,000, Gains: $700,000 + $300,000 = $1,000,000).

Answer 168

Principal and interest requirements to maturity, presented separately, for each of the five subsequent fiscal years and in 5-year increments thereafter GASB 1500.129 requires disclosure of principal and interest requirements to maturity, presented separately, for each of the five subsequent fiscal years and in 5-year increments thereafter.

Answer 169

$51,600 The amount of interest revenue that Glade will earn over the life of the lease is $51,600: Annual lease payment = Fair value of equipment / Present value factor = $323,400 / 4.312 = $75,000 Total lease amount collected = Annual lease payment x 5 years = $75,000 x 5 = $375,000 Interest revenue = Lease amount collected - Fair value of equipment earned = $375,000 - $323,400 = $51,600

Answer 170

Instrument-by-instrument basis An entity may choose to elect the fair value option on an instrument-by-instrument basis for an eligible item only on the date that one of the following occurs: The entity first recognizes the eligible item. The entity enters into an eligible firm commitment. Financial assets that have been reported at fair value with unrealized gains and losses included in earnings because of specialized accounting principles cease to qualify for that specialized accounting. The accounting treatment for an investment in another entity changes because the investment becomes subject to the equity method of accounting. An event occurs that requires an eligible item to be measured at fair value at the time of the event but does not require fair value measurement at each reporting date after that, excluding the recognition of impairment under lower-of-cost-or-market accounting or other-than-temporary impairment of equity securities.

Answer 171

Gain in value of debt Instrument A only FASB ASC 815-25-35-1 requires that gains or losses associated with changes in the fair value of the hedging instrument be recognized in net income in the period in which the change in fair value takes place. The gain or loss resulting from changes in the fair value of a cash flow hedge is included in other comprehensive income. Consequently, only the gain in the value of Instrument A would be included in net income.

Answer 172

Lease Liability = $76,840; Interest Expense = $7,807 The original liability can be calculated in one of two ways: (1) present value of an annuity due for 4 periods at 7% or (2) present value of an ordinary annuity for 3 periods plus the first payment. The answer is exactly the same. Present Value, Annuity Due (PVAD): $42,500 at 7% for 4 periods = $42,500 × 3.62432 = $154,033 Present Value, Ordinary Annuity (PVOA): $42,500 at 7% for 4 periods = $42,500 × 2.62432 = $111,533 + $42,500 = $154,033 One payment is made on day one, reducing the lease liability before any interest ($154,033 – $42,500 = $111,533). Interest on the liability for the year would be $7,807 ($111,533 × .07), recorded with another payment made on the last day of the year, so the liability would be $76,840 with rounding ($111,533 – $34,693 ($42,500 – $7,807)).

Answer 173

Either on the face of the statement of financial position or in the notes to the financial statements Nongovernmental not-for-profit entities have the option to report board designated net assets either on the face of the statement of financial position or in the notes to the financial statements.

Answer 174

$476000 When a company is bought, in whole or in part, the purchase price may exceed the fair values of all the company’s net assets. The amount of this excess is goodwill from the purchase. Purchase cost of stock of $960,000 − 55% of identifiable assets (55% of $880,000) of $484000 = Excess of purchase price over fair value of assets (Goodwill) of $476000

Answer 175

12 months. Current items cover a period which is the company operating cycle (6 months) or a year, whichever is longer, and a year is longer than six months. Thus, for this company, items covering a 12-month period going forward are current.

Answer 176

Requires future transfer of assets SFAC 6, Elements of Financial Statements, defines a liability as a “probable future sacrifice of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.” Because liabilities can be reduced via providing services, a future transfer of assets is not required.

Answer 177

The real estate holdings would be included with the other net assets with donor restrictions, with no other details offered. In addition to the sum of the two classes of net assets, the FASB requires information about the nature and amounts of the different types of restricted assets of a not-for-profit entity to be disclosed. Disclosure could be on the face of the statements, in the notes to the statements, or by a combination of both.

Answer 178

Dividends received from investments FASB ASC 230-10-45-25 identifies several classes of receipts and payments that should be used in reporting cash flows from operating activities using the direct method. Included in the list of items are interest and dividends received. The transactions or events related to the other items listed are not reported in the operating activities section.

Answer 179

fair value. Land and other real estate held as investments by endowments in a government permanent fund should be reported at fair value, not historical cost or the lower of cost and NRV (net realizable value). There is no requirement to deduct the cost of disposal from fair value.

Answer 180

decreases both accounts receivable and the allowance for uncollectible accounts. Typical journal entries under the allowance method include: Debit Credit (a) Bad debt expense xx Allowance for uncollectible accounts xx To recognize periodic uncollectible accounts expense and provide allowance. (b) Allowance for uncollectible accounts xx Accounts receivable xx To write off uncollectible account. Note: When an account is written off (e.g., b) both accounts receivable and allowance for uncollectible accounts are decreased.

Answer 181

Governmental fund liability: $12,500; Proprietary fund liability: $100,000; Governmental activities liability: $250,000; Business-like activities liability: $100,000 As employees earn the right to claim vacation pay, a compensated absence, the liability is accrued and reported in full in the proprietary fund and government-wide financial statements (governmental activities and business-like activities). The portion reported in the government-wide financial statements as governmental activities is a general long-term liability. The governmental funds, using the modified accrual method, report only the portion of the liability expected to be claimed by employees in the first 60 days of the new fiscal year.

Answer 182

Statement of activities The statement of activities provides information about the change in amount and nature of net assets by reporting on changes in net assets with donor restrictions and net assets without donor restrictions for a period of time. The statement of financial position is comparable to a balance sheet, and reports assets, liabilities, and net assets (rather than equity) at a point in time. Cash receipts and cash payments are reported on the statement of cash flows.

Answer 183

$16,000 Peabody would recognize $16,000 in Year 1, calculated as follows: Cost $400,000 Income under equity method ($60,000 x 0.30) 18,000 $18,000 Dividends ($20,000 x 0.30) (6,000) Balance using equity method $412,000 Fair value adjustment* (2,000) (2,000) Net income from the investment $16,000 * Fair value adjustment is $412,000 − $410,000.

Answer 184

$4,000 The investor receiving stock rights must allocate a portion of the purchase price of the investment that “carried” the rights. Here, although the stock rights were received 6 months after the purchase, the rights still “ride” with the purchase. Thus, the stock rights are allocated a portion of the purchase price based on the market value of the rights as a percentage of the total market value of the stock investment plus the rights at the balance sheet date: Cost of shares acquired = 1,000 x $80 = $80,000 Cost allocated to stock rights = $80,000 ($5 / ($95 + $5)) = $80,000 ($5 / $100) = $4,000

Answer 185

In the period received at fair value Unconditional contributions, whether promised or received as cash, are recognized as revenue in the period received. Contributions revenue should be measured at fair value, not donor's book value. Donor intentions to give, rather than unconditional promises, are not considered revenue.

Answer 186

$7.94 The exercise of the incentive stock options would be antidilutive since the exercise price exceeds the market price of the stock. Weighted-average shares: January 1 to March 31 (3/12 x 15,000) 3,750 April 1 to May 31 (2/12 x 12,500) 2,083 June 1 to December 31 (7/12 x 17,000) 9,917 Total 15,750 $125,000 / 15,750 = $7.94

Answer 187

a careful pro forma presentation of the implications of current year's decisions for future financial statements. While managers may wish to discuss implications and contingent outcomes of current decisions, these matters should be presented elsewhere in the comprehensive annual financial report, such as the letter of transmittal or in other supplementary information. The other answer choices consist of MD&A requirements discussed in GASB 2200.106–.109

Answer 188

1.5 The acid-test or quick ratio divides total cash and accounts receivable over total current liabilities. Thus, the acid-test ratio will be, at the end of the year, 1.5, computed as follows: $300 + $1,200 = $1,500 $1,500 ÷ $1,000 = 1.5

Answer 189

$10,800 Rent for Year 1 $ 8,000 x 6/12 = $ 4,000 Rent for Years 2-5 $12,500 x 4 = 50,000 Total for five years $54,000 Rent for 1 year (amount to be reported for 20X1) $54,000 / 5 = $10,800

Answer 190

neither IFRS nor U.S. GAAP. Lessees measure the right-of-use assets under both IFRS (International Financial Reporting Standards) and U.S. GAAP. Right-of-use (ROU) assets under both start with the lease liability measurement, which adds guaranteed residual values to the liability and ROU, rather than subtracting it.

Answer 191

($1,000,000) oward should recognize a $1,000,000 loss for year 1. Generally, a portion of contract revenue is recognized on an estimated basis in each period covered by the contract. However, if there is an estimated loss, the total estimated loss on the contract is recognized in the period in which the loss becomes apparent and estimable. Actual costs incurred to date $ 2,000,000 Estimated costs to complete 6,000,000 Total estimated cost $ 8,000,000 Less contract price 7,000,000 Estimated loss on contract $(1,000,000)

Answer 192

Interest expense: overstated; Total stockholders’ equity: understated When a bond is issued for a premium, then the issuer receives more than the face amount of the debt upon issuance. Thus, the issuer will pay back (the face amount) less than the amount received. The additional receipts lower the interest expense over the course of the repayment, since the overall net repaid amount is less. As the bonds are repaid, the premium is amortized and lowers the interest expense taken over the term of the bond. If the amortization is not taken, then the interest expense is overstated, and the net income understated. (Thus, retained earnings and stockholder’s equity are also too low.)

Answer 193

The right to use a new asset is obtained and the lease is priced at standalone market price. Both a lessee and a lessor should account for a lease modification as a new lease, separate from the original lease, when the lease grants the lessee an additional right of use not included in the original lease, and the additional right of use is priced commensurate with its standalone price (in the context of that particular contract).

Answer 194

Related party reporting Many reporting entity disclosures are part of separate standards (e.g., segment reporting and related party information) and therefore do not require additional disclosure requirements. Items included under this category include the nature of primary activities, special restrictions, advantages and disadvantages relative to other entities including unusual or unique regulatory or legal factors not readily available to users (e.g., one entity holds subsidiaries to sell and another integrates them into operations), related party disclosures, and disaggregated legal entity and segment information.

Answer 195

Plant and equipment, fair value; Long-term debt, fair value This must be accounted for under the acquisition method. Assets and liabilities are recorded at fair value. Any excess of acquisition price over fair value is recorded as goodwill.

Answer 196

Included in net income and disclosed in the notes to interim financial statements Discontinued operations should be reported separately, net-of-tax, on the income statement for the interim period. Disclosure in the notes to the interim statements is required.

Answer 197

Financing activities According to FASB ASC 958-230-55-3, a contribution to a not-for-profit restricted to long-term purposes like construction shall be reported as a cash flow from financing activities. Cash flows received from investment income restricted by donor stipulation to the same purposes also are reported as financing activities, not as operating activities.

Answer 198

$5,750 Initial amount of lease $135,000 Less first payment 20,000 Lease amount applicable to last half of 20X1 $115,000 Times interest rate (10% x 6/12 year) x .05 Interest revenue for 20X1 $ 5,750

Answer 199

replacement cost. Inventory measured using any method other than LIFO or the retail inventory method (e.g., FIFO or average cost) is measured at the lower of cost and net realizable value (NRV), which is defined to be the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. If the NRV of inventory is lower than its cost, the difference is recognized as a loss in earnings in the period in which it occurs. Replacement cost is the basic measure of market value in the context of lower of cost or market valuation of inventory. However, there are both a “ceiling” and a “floor” to consider in order not to overstate or understate the inventory value. NRV is the ceiling; NRV minus a normal profit margin is the floor. The measure of market value cannot exceed the ceiling or be lower than the floor. Therefore, the market value is considered to be the middle value of replacement cost, the net realizable value, and the net realizable value less a normal profit margin. If replacement cost is between the ceiling and the floor, then replacement cost is the measure of market value. If replacement cost is above the ceiling, then net realizable value is the measure of market value. If replacement cost is below the floor, then net realizable value less a normal profit margin is the measure of market value. In this problem, replacement cost is below the floor; therefore, net realizable value less a normal profit margin is the measure of market value. The cost is higher than this measure. Therefore, under the lower of cost or market concept, net realizable value less a normal profit margin is the value of the inventory.

Answer 200

$0 Encumbrances resulting from the issuance of purchase orders or approval of contracts are not reported as liabilities since neither the goods nor services have been received. A liability is recorded on the books only when the goods/services are received. However, depending on the legal restrictions observed by the Community College, the encumbrances may be shown as committed or assigned fund balance. As a public institution, Community College engages in governmental and business-type activities and follows the full governmental model.

Answer 201

Discount on note receivable: Yes; Prepaid asset: Yes If a noninterest-bearing note due in three years is issued in connection with a contract to purchase merchandise, a discount on notes receivable for the imputed interest should be established as a valuation account and amortized over the 3-year period using the effective interest method. The contract to purchase should be shown as a prepaid asset (prepaid purchases) for the amount of the 10% discount on the fixed amount of purchases. The deferred charge will be written off in the ratio of purchases made to the fixed amount of merchandise required to be purchased.

Answer 202

The freight cost should be capitalized as part of property, plant, and equipment, and the interest cost should be immediately expensed. The costs to buy equipment, along with the costs to bring it to its location for use and make it ready for use, are capitalized into the cost of the equipment. Any interest costs in financing the purchase of equipment (which is otherwise ready to use) are finance (interest) costs and are expensed.

Answer 203

An analysis of expenses by both functional and natural classifications Not-for-profit entities (NFPs) must disclose the availability of financial assets to meet cash needs for general expenditures within one year as part of their quantitative disclosures. Additional quantitative note disclosures include information about the availability of financial assets due to their nature (i.e., their liquidity); external limits imposed by donors, laws, and contracts; and internal limitations. An analysis of expenses by both functional and natural classifications can be disclosed either in the notes or on the face of the statement of financial position.

Answer 204

$145,000 Total capital prior to admission of Capp = $348,000 + $232,000 = $580,000. Since Capp is contributing an amount exactly equal to 20% of final capital, the $580,000 represents 80% of final capital. Final capital = $580,000 / .80 = $725,000 Less Alfa and Beda capital 580,000 Contribution to be made by Capp $145,000

Answer 205

dividends to shareholders. Comprehensive income is defined in the FASB's conceptual framework as “the change in equity (net assets) of a business enterprise, during a period, from transactions and other events and circumstances from nonowner sources.” Comprehensive income includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. Dividends are a distribution to owners and would therefore not be included in comprehensive income. The other three answer choices (revenues from external customers, interest expense to bondholders, and loss from a tornado) would be included.

Answer 206

Credit tax anticipation notes payable In this problem, a city obtained short-term bank financing secured by the city's taxing power. This is interpreted to mean that (1) the General Fund is involved, since some or all of a city's tax revenues are normally recorded in that fund, and (2) future tax proceeds will be used to repay the loan. The journal entry to record the transaction will include a debit to cash, of course. In this problem, the loan is short-term and there is no information to suggest that the loan will be refinanced with long-term borrowing. Therefore, the loan represents establishment of a fund liability (not an increase in “other financing sources” as is the case when the General Fund accounts for the proceeds from long-term borrowing). The credit side of the entry then must be to some liability account. The only available response in this problem that increases a liability is “credit tax anticipation notes payable.” Moreover, in view of the information given, this is the ideal response.

Answer 207

The lessor is required to derecognize the underlying asset. The statements “Most leases consist of property” and “Interest expense related to the discount and amortization related to the right-of use (ROU) asset are combined into a single lease expense” are true for operating leases, not finance leases. The right-of-use (ROU) asset and lease liability are initially measured at the present value of the lease payments, not fair value. Only the statement “The lessor is required to derecognize the underlying asset” is correct

Answer 208

$52,500 The only donor restriction of the use of the donation is that the interest of $52,500 be used to provide a summer camp experience for blind children. The restriction will be satisfied when the $52,500 is spent for the specific purpose stipulated. The $350,000 principal from the debt securities is classified as net assets without donor restrictions, even though a portion of it is designated by the board of trustees, because the board is not a donor.

Answer 209

$1,300,000 Correct Term bonds are bonds which are scheduled to be outstanding for a fixed period of time, or term. Blue Corp.'s term bonds include: 9-3/4% registered debentures $ 700,000 9-1/2% collateral trust bonds 600,000 Total term bond $1,300,000 ========== Note: The 10% subordinated debentures are serial bonds, bonds which mature at regular intervals over a specified time period.

Answer 210

credit to Additional Paid-in Capital–Common Stock for $73,000. When stock options are exercised in full, the amount recorded to Additional Paid-in Capital—Stock Options is equal to the total compensation expense recorded for the stock options (2,000 × $8.50 = $17,000). Cash is recorded for the amount of the exercise price times the number of options exercised (2,000 × $35 = $70,000). The issuance of the new shares is also recorded, at par (2,000 × $7 = $14,000). The journal entry for the exercise of the options granted by Hickory is as follows: Cash 70,000 Additional Paid-in Capital—Stock Options 17,000 Common Stock 14,000 Additional Paid-in Capital—Common Stock 73,000

Answer 211

$1,710,000 Goods shipped FOB shipping point in transit at the end of the period are considered the buyer's and should be included on the buyer's records. The goods in the shipping area were not in transit and therefore should be included in inventory. Inventory on December 31, 20X1, per physical count $1,500,000 Unrecorded purchase (in transit) 90,000 Goods not "sold" on December 31, 20X1 (not shipped) 120,000 Adjusted inventory on December 31, 20X1 $1,710,000

Answer 212

face value of the bonds at the beginning of the period by the contractual interest rate. Whether the bond is issued at a premium or discount or at par, the interest payable (in cash) is calculated the same way: face value (principal) of the bonds times coupon (contractual interest rate). The same is true for the straight-line method as well. Interest expense for the period is the carrying value times the effective rate. Multiplying the face value of the bonds at the beginning of the period by the effective interest rates, or multiplying the carrying value of the bonds at the beginning of the period by the contractual interest rate have no accounting use per se.

Answer 213

Charges for services The GASB has prescribed that fines and forfeitures are included in charges for services. They result from direct charges to those who are directly affected by a program or service, even though they receive no benefit.

Answer 214

a recording error. A recording error must have been made if the balance in the Fund Balance—Reserved for Encumbrances account exceeds the amount of encumbrances. For example, when a purchase order is approved, the estimated amount is recorded in the journal entry: Encumbrances XX Fund Balance--Reserved for Encumbrances XX When the purchase order is filled, the entry is reversed, for the amount estimated, and the actual expenditure is recorded. The actual amount of expenditures may be more or less than the estimated amount, but that would not affect the encumbrance accounts.

Answer 215

Both IFRS and U.S. GAAP permit lease guidance to apply to intangible assets. Only IFRS (International Financial Reporting Standards) permits that a lessee may apply the leasing guidance to leases of intangible assets other than those under licensing arrangements; U.S. GAAP does not include this option. The other answer choices are correct: U.S. GAAP restricts the definition of a lease to identified property, plant, or equipment. The IFRS lease definition is not restricted to only property, plant, or equipment; a lease can be for any asset. IFRS uses a single-lease accounting model where all leases are finance leases; U.S. GAAP uses a dual-lease accounting model to differentiate between an operating lease and a finance lease. IFRS includes a recognition exemption for low-value lease assets (approximately $5,000), while the U.S. GAAP standard does not list a specific cost threshold but does allow that “immaterial” assets do not need to be capitalized.

Answer 216

$90,000 Under FASB ASC 958-605-25-2, not-for-profit entities must record unconditional promises to give as contributions revenue when the promise is made. Under FASB ASC 958-605-30-6, such contributions may be recorded at net realizable value, or net of any allowance for uncollectible pledges.

Answer 217

The financial statements for Years 1 and 2 should be restated; the cumulative effect of the error on Years 1 and 2 should be reflected in the carrying amounts of assets and liabilities as of the beginning of Year 3. A correction of an accounting error must be reported by restating the financial statements for all prior years. The carrying amounts for assets, liabilities, and beginning retained earnings must be restated for the earliest year presented in the financial statements presented in the year the error is discovered.

Answer 218

An interest expense that is greater than the cash payment made to bondholders Interest expense is Carrying amount × Effective interest rate. Cash payment amount is Face amount × Stated interest rate. In this example, the stated rate is less than the effective rate, so the cash payment is less than the interest expense.

Answer 219

None of these items would be part of the acquisition cost. FASB ASC 805-10-25-21 requires that acquisition-related costs be charged to expense. All of these costs are acquisition-related costs and should be expensed in the period incurred. FASB ASC 805-10-25-23 states the following: "Acquisition-related costs are costs the acquirer incurs to effect a business combination. Those costs include finder's fees; advisory, legal, accounting, valuation, and other professional or consulting fees; general administrative costs, including the costs of maintaining an internal acquisitions department; and costs of registering and issuing debt and equity securities. The acquirer shall account for acquisition-related costs as expenses in the periods in which the costs are incurred and the services are received, with one exception. The costs to issue debt or equity securities shall be recognized in accordance with other applicable GAAP."

Answer 220

understated by $78,000. The items making up cost of goods sold (based on a periodic inventory model) are: add beginning inventory to net purchases to get goods available for sale, then subtract ending inventory from that to get cost of goods sold. If beginning inventory is understated, then so will goods available for sale, and cost of goods sold also. If ending inventory is overstated, then too much is taken out in computing cost of goods sold, and again cost of goods sold will be understated. Thus, if both beginning inventory is understated by $26,000 and ending inventory is overstated by $52,000, then cost of goods sold will be understated by both of those amounts together, $26,000 + $52,000, for a total understatement of cost of goods sold of $78,000.

Answer 221

$83,000 Using dollar-value LIFO (last in, first out) requires ending inventories to be restated at base-year price levels of the first year the method was adopted. This allows the use of the constant dollar-base-year values to be used as the way to estimate additional layer amounts, if any, in later years. At the beginning of this year, $50,000 of inventory was on hand. During the year, an additional level of $30,000 (at base-year prices) was added. To find the ending dollar-value LIFO amount, take the beginning inventory at its value without adjustment, $50,000, and then add only the new layer at the present price level. Thus, the answer is: Carryforward layer ($50,000 x 1) $50,000 Plus the new layer at its additional 10% price level ($30,000 x 1.10) 33,000 Total of ending inventory dollar-value LIFO $83,000 Since designated market exceeds cost at year-end, no lower of cost or market loss of utility has occurred.

Answer 222

$75,000 The question asks for the gross accounts receivable balance at the end of the year. Take beginning balance, add credit sales, and then subtract collections and accounts written off. Collections of prior written-off accounts will not affect the gross accounts receivables. December 31, 20X1, balance $100,000 Credit sales in year 20X2 $611,000 Less collections in year 20X2 591,000 Increase 20,000 December 31, 20X2, balance before write-offs 120,000 Less accounts written off 45,000 Balance in Accounts Receivable at December 31, 20X2 75,000 ======= In order to adjust the balance of accounts receivable to remove the accounts written off the following journal entry: Dr. Allowance for Doubtful Accounts 45,000 Cr. Accounts Receivable 45,000 Note: The recovery results in a $17,000 increase and also a $17,000 decrease in accounts receivable.

Answer 223

$17,000 Finance lease liability before first payment $270,000 Less December 31, 20X1, payment (all attributed to reduction in lease liability) 40,000 Finance lease liability at 01/01/X2 $230,000 ======== December 31, 20X2, lease payment $40,000 Less interest portion (10% x 230,000) 23,000 Amount considered reduction in lease liability $17,000

Answer 224

Debit deferred revenues. Encumbrance accounting is only one feature of the accounting practices used by municipalities for governmental funds. Accounting for governmental funds is done on the modified accrual basis. There are many instances where a grant is awarded and received in cash prior to the recipient city incurring “qualifying” expenditures. In such instances, receipt of the grant proceeds is recorded with a debit to cash and a credit to a deferred revenues (liability) account. Then, as qualifying expenditures are incurred, the related grant revenues are recognized by debiting deferred revenues and crediting revenues.

Answer 225

The customer has not accepted the asset and lacks legal title to the asset. Transfer occurs when the customer obtains control of the goods or services, either at a point in time or over time, as applicable. Control in this context is defined as the ability to direct the use of and obtain substantially all of the remaining benefits from an asset, including the ability to prevent other entities from directing the use of and obtaining the benefits from an asset (“defensive control”). Additional indicators of control include the entity has a present right to payment for the asset; the customer has legal title to the asset; the entity has transferred physical possession of the asset; the customer has the significant risks and rewards of ownership of the asset; and the customer has accepted the asset.

Answer 226

$180,000 FASB ASC 820 defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” Fair value measurement assumes that the transaction occurs in the principal market for the asset or liability. If there is no principal market for that type of asset or liability, the entity should use the most advantageous market for that asset or liability; therefore, the fair value of the land should be determined using the residential market, which is $180,000.

Answer 227

$1,500 A foreign currency transaction loss occurred because it cost more to purchase the units of foreign currency on December 31 ($.70) than it cost when the transaction originated on September 22 ($.55). The amount of loss would be computed as follows: Transaction loss = Number of units x Change in rate = 10,000 x ($.70 - $.55) = 10,000 x $.15 = $1,500

Answer 228

$140,000 Gross profit is calculated as net sales revenues less cost of goods sold. The amount of deferred gross profit to be reported is equal to total gross profit less the gross profit realized through cash collections. Total gross profit for the installment sale is computed as follows: $600,000 – $400,000 = $200,000. Selling and administrative expenses are period costs and are not considered when assessing the gross profit reported by Juniper. The amount of gross profit realized is based on the gross profit percentage and the total cash collections. The gross profit percentage on the installment sales is computed as follows: ($600,000 – $400,000) ÷ $600,000 = 33%. Cash collections of $180,000 are multiplied by the gross profit percentage to arrive at the total gross profit realized of $60,000 ($180,000 × .33). Total gross profit of $200,000 less realized gross profit of $60,000 equals $140,000 of deferred gross profit to be reported at the end of the year.

Answer 229

Rule adoption The SEC website lists the following steps in the rulemaking process: Concept Release: The rulemaking process usually begins with a rule proposal, but sometimes an issue is so unique and/or complicated that the SEC seeks out public input on which, if any, regulatory approach is appropriate. A concept release is issued describing the area of interest and the SEC's concerns, usually identifying different approaches to addressing the problem, followed by a series of questions that seek the views of the public on the issue. The public's feedback is taken into consideration as the SEC decides which approach, if any, is appropriate. Rule Proposal: The SEC publishes a detailed formal rule proposal for public comment. Unlike a concept release, a rule proposal advances specific objectives and methods for achieving them. Typically, the SEC provides between 30 and 60 days for review and comment. Just as with a concept release, the public comment is considered vital to the formulation of a final rule. Rule Adoption: Finally, the SEC Commissioners consider what they have learned from the public exposure of the proposed rule, and seek to agree on the specifics of a final rule. If a final measure is then adopted by vote of the full Commission, it becomes part of the official rules that govern the securities industry.

Answer 230

$20,500 “With recourse” means that the financial entity where the note was discounted can collect fully from Davis Co. in the event the maker does not honor the note. Davis Co. should disclose the full amount ($20,500) of the note as a contingent liability in its December 31, 20X1, financial statements, because it is reasonably possible that Davis will have to make good on the note (FASB ASC 450-20-50-2).

Answer 231

$37,000 Cash proceeds from the sale of an investment are a cash inflow and cash paid to purchase stock is a cash outflow. Both are investing activities. $75,000 - $38,000 = $37,000

Answer 232

Confirmatory value SFAC 8, chapter 3 (“Qualitative Characteristics of Useful Financial Information”) discusses relevance in paragraphs QC6 through QC10: "QC6. Relevant financial information is capable of making a difference in the decisions made by users. Information may be capable of making a difference in a decision even if some users choose not to take advantage of it or already are aware of it from other sources. "QC7. Financial information is capable of making a difference in decisions if it has predictive value, confirmatory value, or both. "QC8. Financial information has predictive value if it can be used as an input to processes employed by users to predict future outcomes. Financial information need not be a prediction or forecast to have predictive value. Financial information with predictive value is employed by users in making their own predictions. "QC9. Financial information has confirmatory value if it provides feedback (confirms or changes) about previous evaluations. "QC10. The predictive value and confirmatory value of financial information are interrelated. Information that has predictive value often also has confirmatory value. For example, revenue information for the current year, which can be used as the basis for predicting revenues in future years, also can be compared with revenue predictions for the current year that were made in past years. The results of those comparisons can help a user to correct and improve the processes that were used to make those previous predictions."

Answer 233

$1,220,000 Research and development costs are identified in five categories: Materials, equipment, and facilities used in R&D activities Personnel engaged in R&D activities Intangibles purchased or developed for use in R&D activities Contract services acquired and used in conjunction with R&D activities Indirect costs reasonably allocable to R&D activities A particularly important aspect of determining whether items included in (1) and (3) above are research and development is whether the item (e.g., machinery, equipment, patent) has an alternative use in other R&D projects. If an alternative use exists, the cost is capitalized as a tangible or intangible asset and depreciated or amortized. The periodic depreciation or amortization is identified as R&D expense as long as the asset is used in R&D activity. If no alternative use exists, the expenditure is charged to R&D in the period of acquisition. Costs to obtain a patent are not R&D expenditures and should be capitalized. The research and development expenses include the following: Depreciation on equipment with an alternate use ($100,000 / 5) $ 20,000 Equipment for current project 200,000 Research and development salaries 400,000 Material and labor costs 600,000 Total $1,220,000

Answer 234

$0 If the possibility that a company will be required to pay a contingent liability is reasonably possible, the liability is not required to accrue the liability. However, the nature of the liability and an estimate of the loss (or range of loss) must be disclosed. If it is probable that the company will acquire assets in the future due to the contingency, the gain cannot be recognized. In this problem, the “reasonably possible” loss will not be accrued, only disclosed. The contingent gain cannot be accrued.

Answer 235

The amount of net gain or loss recognized in earnings when a hedged firm commitment no longer qualifies as a fair value hedge Of the answer choices listed, only “the amount of net gain or loss recognized in earnings when a hedged firm commitment no longer qualifies as a fair value hedge” is a disclosure requirement for a fair value hedge. The other answer choices are disclosure requirements for a cash flow hedge.

Answer 236

Exempt from federal taxation Entities having status as bodies corporate and politic and entities with the power to enact and enforce a tax levy are each considered governmental organizations (joint FASB/GASB definition of governmental organizations included in several AICPA Audit and Accounting Guides, including State and Local Governments, paragraph 1.01). However, many nongovernmental organizations are exempt from federal taxation.

Answer 237

a program expense (Public Works) in the statement of activities, but not as an expenditure in the general fund. The general fund, as a governmental fund, is accounted for from the current financial resources perspective. Therefore, capital assets and revaluations of capital assets are not reported. In the government-wide statements, impairment is a revaluation of a capital asset that is reported as an expense in the statement of activities. Depending on circumstances, an expense could be reported in the statement of activities as a program expense, special item, or extraordinary item. In this case, as the asset is used in a specific program for the Public Works department, and the determination appears to have already been made that it does not meet the criteria for treatment as a special item, the best choice is to report the expense as a program expense.

Answer 238

$3,600 deferred tax asset Deferred amounts created by temporary differences will be taxed (deducted) in the future and they are measured employing the tax rates expected to apply to them. Deferred income tax asset = Temporary differences × Tax rate = ($48,000 – $30,000) × 0.20 = $3,600 For a particular tax-paying component of an enterprise and within a particular tax jurisdiction, all deferred tax liabilities and assets are offset and presented as a single noncurrent amount on the balance sheet. An enterprise cannot offset deferred tax liabilities and assets attributable to different tax-paying components of the enterprise or to different tax jurisdictions.

Answer 239

$25,000 An estimate of the effective tax rate expected for the annual period is made at the end of each interim period. This rate is used in providing for income taxes on a current year-to-date basis. Worth should use its expected rate of 25%: $100,000 × 0.25 = $25,000.

Answer 240

$471,571 The discount on the note represents the difference between the cash received and the face value of the note. To determine the cash that Vann would receive for the 1-year note, Vann would take the face value divided by 1 plus the interest rate. Vann could also use a present value table or calculator. The difference in this value and the face value is the discount. Vann would then amortize the discount at a straight-line rate* of 1/12 per month for the 5 months the note is outstanding in 20X1 (see below for calculations). Face value: $500,000 (a) Discount rate: 1.108 (1 + 10.8%) Present value: $451,264 (b) Discount (a − b): $48,736 (c) 5-month amortization (d): $20,307 (c ÷ 12 × 5) Carrying value at 12/31: $471,571 (Present value + 5-month amortization, rounded) * Straight-line amortization of a discount or premium is permissible under GAAP if the results of the straight-line amortization are not materially different from the effective interest method.

Answer 241

$8,500 Initial lease obligation on December 31, 20X1 $135,000 Less payment made on December 31, 20X1 - 20,000 Lease obligation during 20X2 $115,000 Portion of December 31, 20X2, payment that is interest = rate x obligation x time = 10% x $115,000 x 1 = $11,500 Portion of December 31, 20X2, payment that is related to lease obligation = payment - interest portion = $20,000 - $11,500 = $8,500

Answer 242

Depreciation expense would be decreased and goodwill impairment would be assessed. Goodwill is the excess of the fair value of the consideration given over the fair value of the net identifiable assets acquired. The carrying amounts of Scarp's assets and liabilities approximated their fair values, except that the fair value of the building is less than its book value. Since Prim paid cash equal to the book value of the stock, the amount paid was greater than the fair value of the net identifiable assets of Scarp, resulting in goodwill being recognized. In this particular case, the amount of the goodwill is equal to the excess of the book value of the building over its fair value. One could argue that Scarp already should have recognized an impairment loss on its own books with regard to the building. However, there is insufficient information to know if the criteria specified in FASB ASC 360-10-05-4 have been met. The mere fact that the fair value of the building is less than its book value is not necessarily sufficient evidence. Thus, presumably the depreciation expense recorded by Scarp is based on the book value amount. In any event, the building should be included in the consolidated assets at its fair value, which is an amount lower than its book value. The consolidated depreciation should be based on this lower amount. Therefore, the consolidated depreciation expense is less than the sum of the depreciation amounts reported by Prim and Scarp as separate entities (i.e., before the consolidated statements are prepared). Thus, for consolidated financial statement purposes, depreciation is decreased from the amounts reported by the two separate entities. Regardless of the depreciation issue, FASB ASC 350-20-35-28 requires goodwill to be tested for impairment at least annually, as well as in the year of acquisition. Therefore, goodwill impairment must be assessed in this case.

Answer 243

$476,941 The bonds were issued at a discount, and one must amortize the discount up to the balance sheet date. The interest paid is 9% of the face amount of $500,000, but the interest expense is the yield multiplied by the carrying amount. The difference of these is the discount amortization added to the carrying amount of the bonds. Face amount of bonds $500,000 Less: Issue price 475,658 Bond discount at issue date $ 24,342 June 30, 20X1, journal entry to accrue interest and amortize discount: Dr. Cr. Bond interest expense 23,783 (10% x $475,658 x 6/12) Discount on bonds payable ($23,783 - $22,500) 1,283 Interest Payable (9% x $500,000 x 6/12) 22,500 Bonds payable on June 30, 20X1, balance sheet: Bonds payable $500,000 Less: Unamortized discount ($24,342 - $1,283) 23,059 Net bonds payable $476,941

Answer 244

I and II only The expected loss on the disposal to be reported in Smith Co.'s income statement for the period ended December 31, 20X1, would include actual operating losses for 20X1. FASB ASC 205-20-45-3 states: "In a period in which a component of an entity either has been disposed of or is classified as held for sale, the income statement of a business entity or statement of activities of a not-for-profit entity (NFP) for current and prior periods shall report the results of operations of the component, including any gain or loss recognized in accordance with paragraphs 360-10-35-40 and 360-10-40-5, in discontinued operations. The results of operations of a component classified as held for sale shall be reported in discontinued operations in the period(s) in which they occur. The results of discontinued operations, less applicable income taxes (benefit), shall be reported as a separate component of income. For example, the results of discontinued operations may be reported in the income statement of a business entity as follows: Income from continuing operations before income taxes $XXXX Income taxes XXX Income from continuing operations $XXXX ``` Discontinued operations (Note X): Loss from operations of discontinued Component X (including loss on disposal of $XXX) $XXXX ``` Income tax benefit XXXX Loss on discontinued operations XXXX Net Income $XXXX ===== "A gain or loss recognized on the disposal shall be disclosed either on the face of the income statement or in the notes to financial statements."

Answer 245

$100,000 In a consolidated balance sheet, only the common stock of the parent entity is labeled “common stock.” Pare would report its own common stock ($100,000) on the December 31, 20X1, consolidated balance sheet. Note: The 25% non-majority-owned common stock of Kidd Co. would be reported as part of “noncontrolling (minority) interest.”

Answer 246

fair value. The statement of net assets of a pension plan must include net assets reflecting all investments at fair value.

Answer 247

An attorney solicits contributions on behalf of the organization. The classification of contributions received as revenues or gains depends on whether the transactions are part of the NFP’s (not-for-profit entity’s) ongoing major or central activities (revenues). Events are peripheral or incidental if they are not an integral part of an NFP’s usual activities, or if their gross revenues or expenses are not significant in relation to the NFP’s annual budget. For the answer choices for this question, only an attorney soliciting contributions is considered peripheral, and therefore the entity is exempt from reporting those services as gross revenue.

Answer 248

$12,500 of compensation expense per year for four years. The FASB Accounting Standards Codification (ASC) requires the fair value method of accounting for stock option plans. The fair value method recognizes the cost of consideration received for employee services at the fair value of the equity instruments issued. The objective of the measurement process is to allocate the fair value of the stock options (as of the grant date) to the period in which the employees have rendered the required services and satisfied all other conditions necessary to earn the right to benefit from the options. The total fair value of the options on the grant date is $50,000 (10,000 options at $5). The CEO earns the right to these options ratably over a four-year period, so each year the corporation must recognize $12,500 ($50,000 ÷ 4) of compensation expense.

Answer 249

$60,000 When an asset may have sustained a loss in value, due to circumstances occurring by the end of the year, it must be tested for impairment. Under IFRS, the test for and measure of an impairment loss is the excess of carrying value ($500,000) above recoverable amount ($440,000). The recoverable amount is the higher of the value in use (present value of discounted future cash flows) or net realizable value (sales proceeds less cost to sell). The recoverable amount here is the value in use of $440,000, which is larger than the net realizable value of $450,000 - $16,000, or $434,000. Thus, a $60,000 impairment loss is recognized.

Answer 250

$1,660,000 The amount of liabilities reported in the governmental activities column of the government-wide statement of net position is $1,660,000 ($1,500,000 + $120,000 + $40,000). The government-wide financial statements report, on an accrual basis, governmental activities, business-type activities, the primary government totals, and discretely presented component units. The government-wide statement of net position is one of two required statements; the other is the government-wide statement of activities. Governmental activities and business-type activities are reported separately. Governmental activities include all current and noncurrent governmental fund assets and liabilities, general capital assets (including infrastructure such as streets, roads, and bridges), general long-term liabilities, and the assets and liabilities of internal service activities that provide the majority of their services to general government departments.

Answer 251

government-wide and fund financial statements, notes to the financial statements, management's discussion and analysis and other required supplementary information. The minimum requirements for general purpose external financial statements are illustrated in GASB 2200.103 and comprise MD&A, government-wide and fund financial statements with the notes to the financial statements, and RSI other than MD&A. Governments should prepare and publish a comprehensive annual financial report (CAFR), which includes information additional to the basic general-purpose financial statements.

Answer 252

income determination. GASB 1300.102.b states: “Proprietary fund reporting focuses on the determination of operating income, changes in fund net position (or cost recovery), financial position and cash flows.” Reporting in this fund would be comparable to that in a commercial business type of entity, although the difference between revenues and expenses is reported as changes in net position, not as net income.

Answer 253

$400,000 Computer software costs to be sold, leased, or otherwise marketed are charged to expense as research and development until technological feasibility has been established for the product. Technological feasibility is established on completion of a detailed program design or completion of a working model. Since a technological feasibility was established on August 31, all of the costs up to that date (8 × $100,000) would be expensed as research and development expenses. The costs after August 31 (4 × $100,000) would be capitalized.

Answer 254

$1,050,000 Monetary assets are cash or items whose amounts are fixed in terms of numbers of dollars. Demand deposits and receivables are monetary assets; patents and trademarks are not. Demand bank deposits $ 650,000 Net long-term receivables 400,000 Total $1,050,000

Answer 255

Flows and balances of financial resources According to the summary of GASB Concept Statement 1, the primary characteristics of governmental structure are as follows: "(1) The representative form of government and the separation of powers "(2) The federal system of government and the prevalence of intergovernmental revenues "(3) The relationship of taxpayers to services received "These are the primary characteristics that affect financial reporting of governmental-type activities and must be considered in establishing financial reporting objectives."

Answer 256

loss on account receivable resulting from customer's bankruptcy. The loss on account receivable resulting from a customer's bankruptcy relates to an account that existed on the balance sheet date and an adjustment is needed. FASB ASC 855-10 provides guidance as to subsequent events that require recognition: "An entity shall recognize in the financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements." (FASB ASC 855-10-25-1) "The following are examples of recognized subsequent events: "If the events that gave rise to litigation had taken place before the balance sheet date and that litigation is settled, after the balance sheet date but before the financial statements are issued or are available to be issued, for an amount different from the liability recorded in the accounts, then the settlement amount should be considered in estimating the amount of liability recognized in the financial statements at the balance sheet date. "Subsequent events affecting the realization of assets, such as receivables and inventories or the settlement of estimated liabilities, should be recognized in the financial statements when those events represent the culmination of conditions that existed over a relatively long period of time. For example, a loss on an uncollectible trade account receivable as a result of a customer's deteriorating financial condition leading to bankruptcy after the balance sheet date but before the financial statements are issued or are available to be issued ordinarily will be indicative of conditions existing at the balance sheet date. Thus, the effects of the customer's bankruptcy filing shall be considered in determining the amount of uncollectible trade accounts receivable recognized in the financial statements at the balance sheet date." (FASB ASC 855-10-55-1)

Answer 257

reporting segments. SFAC 8 provides a summary of potential additional disclosures for assets and liabilities resulting from financial instruments or other contracts: the contractual or legal terms (e.g., timing of receipts and disbursements), degree of credit or nonperformance risk, potential effect related to inability to pay or perform, and method used to determine the cash flows. Reporting segments are not one of the suggested disclosure items.

Answer 258

For lessee operating leases, the expense recognized would be the straight-line amount of the future lease payments and deferred initial direct costs. Finance leases use the effective interest method, not the straight-line method. This results in yearly interest expense differences. For operating leases, the yearly expense remains constant (straight-line) since it combines the lease liability and amortization into one yearly amount. Lessee operating leases show one constant cost/expense that combines the lease liability unwinding and asset amortization versus finance leases that separate the lease liability unwinding and asset amortization.

Answer 259

a controlling majority of the members of its governing board are appointed by state government officials. The joint FASB/GASB definition of governmental organizations included in several AICPA Audit and Accounting Guides, including State and Local Governments (paragraph 1.01), states that an organization is a government if “a controlling majority of the members of the organization's governing body” are appointed or approved “by officials of one or more state or local governments.” In contrast, many nongovernmental organizations are exempt from federal taxation.

Answer 260

The unfunded projected benefit obligation The FASB requires an entity to recognize on its balance sheet the full underfunded status of its defined benefit pension plans. This is the difference between the fair value of the plan assets and the projected benefit obligation, including all actuarial gains and losses, prior service cost, and any remaining transition amounts. If the benefit obligation is greater than the fair value of plan assets, the plan is underfunded, and a net liability (i.e., unfunded projected benefit obligation) is reported.

Answer 261

2.5 Average inventory = (Beginning inventory + Ending inventory) ÷ 2: ($100,000 + $300,000) ÷ 2 = $200,000 Inventory turnover = Cost of goods sold ÷ Average inventory: ($100,000 + $700,000 - $300,000) ÷ (($100,000 + $300,000) ÷ 2) = 2.5

Answer 262

increase the allowance for uncollectible accounts. Journal entries to: Debit Credit (1) Write an account off: Allowance for Uncollectibles xx Accounts Receivable xx (2) Reinstate account previously written off: Accounts Receivable xx Allowance for Uncollectibles xx (Entry (2) reverses entry (1) to the extent of cash subsequently collected) (3) Collect the account: Cash xx Accounts Receivable xx (Entry (2), the reinstatement, credits or increases the allowance for uncollectible accounts)

Answer 263

$5,560 The first thing one needs to answer this question is the annual payment needed to pay the note. Because the note yields a higher rate (9%) than it pays (8%), the note should have a discount. Since the note has a stated rate of 8%, the annual payments will be based on the present value of an ordinary annuity based on the 8%: Thus, the annual payment is $20,000 ÷ 3.993, or $5,009 annually. The present value of the note, however, and thus the initial discount is based on the yield percentage of 9%. Therefore, the note's initial present value is the payment amount multiplied by 3.89 ($5,009 × 3.89), or $19,485. The total amount to be received on this note is 5 years multiplied by the payment of $5,009, as specified, for a total of $25,045. Interest is generally the amount returned over and above the amount originally recognized, which was $19,485 originally. Thus, the total interest revenue is $25,045 − $19,485, or $5,560. Total cash payments $25,045 ($5,009 × 5 payments) Less: Loan present value − 19,485 ($5,009 × 3.89) Total interest revenue $ 5,560* * Alternatively, a payment amortization schedule could be utilized.

Answer 264

$126,000 Vane should report $126,000, calculated as follows: Net income before taxes ($600,000 – $420,000) $180,000 Income taxes ($180,000 x 0.30) 54,000 Net income from continuing operations $126,000

Answer 265

Credit budgetary fund balance Encumbrance accounting is a feature of the accounting practices used by municipalities for governmental funds. Accounting for governmental funds is done on the modified accrual basis. Annual budgets of estimated inflows and estimated outflows are prepared for the general fund and most other governmental funds. The budget is so important to a city's financial operations for a fiscal year that “budgetary accounting,” a method of integrating budgeted amounts into a city's accounting system, is used. Adoption of the operating budget is recorded by debiting appropriate budgetary accounts for estimated inflows (“estimated revenues”) and crediting the appropriate budgetary accounts for estimated and approved outflows (“appropriations”). “Budgetary fund balance” is debited or credited for the difference. In this problem, since estimated inflows exceed estimated outflows, budgetary fund balance is credited for the difference. (Note: This budgetary entry is reversed at the end of the period as the first closing entry.)

Answer 266

$0 Cash flows from financing activities involve debt and equity financing. Cash flows from investing activities involve asset transactions other than cash and those assets related directly to the determination of operating results (e.g., inventories, receivables). The proceeds from the sale of the building are classified as an investing activity; gains are an operating activity adjustment for noncash items under the indirect method of cash flow presentation. Therefore, the amount that would be included in the financing section is $0.

Answer 267

$4,800 This is a nonmonetary transaction without commercial substance, and thus full gain is not recognized yet, but is instead deferred. Some cash is received, though, so some gain is recognized. $30,000 cash out of a market value of the exchange of $150,000 is 20% of the transaction being in cash, so 20% of the gain is recognized now. Zaro’s gain is $150,000 – $126,000, or $24,000, and 20% of $24,000 is $4,800, the gain recognized now.

Answer 268

$0 Resources provided before that period of qualifying activity should be recognized as deferred revenues. Since the amount of qualifying expenditures exceeded the amount of the advance, there would be no deferred revenues reported at year-end.

Answer 269

$605,000 Use the basic accounting equation: Beginning balance + Additions - Deductions = Ending balance Escrow accounts liability on January 1, 20X1 $ 700,000 Add: Escrow payments received in 20X1 1,580,000 Net interest credited ($50,000 - 10% of $50,000) 45,000 Subtotal $2,325,000 Less: Real estate taxes paid in 20X1 1,720,000 Escrow accounts liability on December 31, 20X1 $ 605,000

Answer 270

$(2,800) in 20X1 and $(1,200) in 20X2. In 20X1, Larkin should recognize a noncurrent deferred tax asset and the related noncurrent deferred tax benefit of $4,000 ($10,000 NOL × 40% tax rate). However, Larkin also must recognize a $1,200 valuation allowance in 20X1. Thus, in 20X1 Larkin should recognize a net tax expense (benefit) of $(4,000) + $1,200 = $(2,800). Note that the recognition of the valuation allowance reduces the net tax benefit recognized in 20X1. The decision in 20X2 that the valuation allowance is no longer necessary means that the valuation allowance should be eliminated, as shown in the following entry in 20X2: Valuation allowance 1,200 Tax expense/benefit - deferred 1,200 Therefore, tax expense (benefit) in 20X2 has a credit balance of $(1,200), indicating a deferred tax benefit. This $(1,200) tax benefit recognized in 20X2 is the change in deferred tax expense/benefit arising from changed circumstances causing a change in judgment as to the amount of valuation.

Answer 271

Cash collections, $600,000; Realized gross profit, $210,000. The amount of deferred gross profit to be realized is related to the amount of installment accounts receivable. If installment accounts receivable is $1,200,000, then 35% of that amount is the amount of deferred gross profit remaining. $1,200,000 × 0.35 = $420,000 is the deferred gross profit yet to be realized, so the realized gross profit for the year is the difference between $630,000 and $420,000, or $210,000. Cash collections are computed by dividing the realized gross profit by the gross profit percentage, or $210,000 ÷ 0.35 = $600,000.

Answer 272

Derived tax revenue Derived tax revenues result from taxes assessed on exchange transactions. The tax on hotel charges fits this description. Other examples are sales taxes, personal and corporate income taxes, and motor fuel taxes.

Answer 273

$120,000. Warranty expense for 20X1: 4% of sales = .04 × $3,000,000 = $120,000 Dr. Cr. Warranty expense 120,000 Estimated warranty liability 120,000 The warranty expense is recognized in the year in which the warranted product is sold. The actual warranty expenditures may or may not be made in that same period. The $67,500 warranty expenditures incurred in 20X1 result in a reduction of the estimated warranty liability. Those expenditures may relate to products sold in 20X1 but they also may relate to products sold in a prior period. The entry for the warranty expenditures made in 20X1 is: Dr. Cr. Estimated warranty liability 67,500 Cash 67,500

Answer 274

increase in the projected benefit obligation due to the passage of time. FASB ASC 715 states: "The interest cost component of net periodic pension cost is interest on the projected benefit obligation, which is a discounted amount. Measuring the projected benefit obligation as a present value requires accrual of an interest cost at rates equal to the assumed discount rates."

Answer 275

$7.00. The book value of common stock is $7.00/share, calculated as follows: Book value/sh = Total Equity - Liquidation value to preferred No. shares common stock outstanding = $1,025,000(a) - $325,000(b) 100,000 shares = $700,000 100,000 shares = $7.00/share a Total SHE = $250,000 + $350,000 + $125,000 + $300,000 = $1,025,000 b Preferred value = Par + Premiums + Dividends in arrears = $250,000 + $50,000 + $25,000 = $325,000

Answer 276

Fees of finders and consultants: Yes; Issuance fees for equity securities issues: No Business combinations accounted for as an acquisition should treat expenses related to the combination as follows: Out-of-pocket costs such as fees of finders and consultants are expensed. Issuance costs such as SEC filing fees are charged to the paid-in-capital account. FASB ASC 805-20-25-2 states the following: "Recognition Conditions: To qualify for recognition as part of applying the acquisition method, the identifiable assets acquired and liabilities assumed must meet the definitions of assets and liabilities in FASB Concepts Statement No. 6, Elements of Financial Statements, at the acquisition date. For example, costs the acquirer expects but is not obligated to incur in the future to effect its plan to exit an activity of an acquiree or to terminate the employment of or relocate an acquiree's employees are not liabilities at the acquisition date. Therefore, the acquirer does not recognize those costs as part of applying the acquisition method. Instead, the acquirer recognizes those costs in its postcombination financial statements in accordance with other applicable generally accepted accounting principles (GAAP)." FASB ASC 805-10-25-23 states the following: "Acquisition-Related Costs: Acquisition-related costs are costs the acquirer incurs to effect a business combination. Those costs include finder's fees; advisory, legal, accounting, valuation, and other professional or consulting fees; general administrative costs, including the costs of maintaining an internal acquisitions department; and costs of registering and issuing debt and equity securities. The acquirer shall account for acquisition-related costs as expenses in the periods in which the costs are incurred and the services are received, with one exception. The costs to issue debt or equity securities shall be recognized in accordance with other applicable GAAP." (Emphasis added)

Answer 277

$281,159 This question is about the computation of the issue price for a bond. The bonds will pay semiannually, and thus will pay $7,500 twice each year, computed as follows: Face amount of $300,000 × 5% coupon × 6/12 (half-year) = $7,500 The bond is priced to yield the market rate, 6% annually or 3% semiannually. The present value of the bonds is thus the $7,500 multiplied by the present value of the ordinary annuity for 16 periods and 3%, plus the $300,000 face value of the bonds multiplied by the present value of $1 at 16 periods, 3%: Issue price = ($7,500 × 12.5611) + ($300,000 × 0.62317) = $94,208 + $186,951 = $281,159

Answer 278

Modified cash basis of accounting where some fixed assets are capitalized while others are expensed Financial statements may be prepared using a comprehensive basis of accounting other than generally accepted accounting principles (often referred to as a special purpose framework). Examples given by AU-C 800.07 are as follows: "Cash basis. A basis of accounting that the entity uses to record cash receipts and disbursements and modifications of the cash basis having substantial support (for example, recording depreciation on fixed assets). "Tax basis. A basis of accounting that the entity uses to file its income tax return for the period covered by the financial statements. "Regulatory basis. A basis of accounting that the entity uses to comply with the requirements or financial reporting provisions of a regulatory agency to whose jurisdiction the entity is subject (for example, a basis of accounting that insurance companies use pursuant to the accounting practices prescribed or permitted by a state insurance commission). "Contractual basis. A basis of accounting that the entity uses to comply with an agreement between the entity and one or more third parties other than the auditor. "Other basis. A basis of accounting that uses a definite set of logical, reasonable criteria that is applied to all material items appearing in financial statements." For the modified cash basis to be an acceptable form, the modifications must be applied logically and consistently. Capitalizing some fixed assets while expensing others would not represent a consistent or logical application of the framework.

Answer 279

included as part of lease payments at present value. Per FASB ASC 842-10-30-5, at the commencement date, lease payments include fixed payments, variable lease payments, reasonably certain option exercise prices, payments for penalties, fees paid by the lessee to owners of a special-purpose entity, and amounts probable of being owed under residual value guarantees. Note: The lessee includes in the payment only the amount of the guaranteed residual value that is probable of being owed. If the expected residual value will be greater than the guaranteed residual value, then the lessee can ignore it.

Answer 280

required using the full governmental model. Public institutions that report as special-purpose governments either engaged only in governmental activities or engaged in both governmental and business-type activities should report infrastructure using the provisions of GASB Statement 34 codified as GASB Sp20.104. These provisions include the reporting of capital assets that are defined in GASB 1400.103 to include infrastructure.

Answer 281

may be allocated between or among accounting periods or may be accounted for as expenditures of the period of acquisition. GASB 1600.127.b states: “Expenditures for insurance and similar services (prepaid items) extending over more than one accounting period need not be allocated between or among accounting periods, but may be accounted for as expenditures of the period of acquisition.”

Answer 282

The notes to the financial statements FASB ASC 825-10-50-20 requires note disclosures regarding a company's concentrations of credit risks.

Answer 283

high and low methods. For each performance obligation satisfied over time, an entity should consistently apply a single method of measuring progress to similar performance obligations and in similar circumstances. Appropriate methods of measuring progress include output methods and input methods. Output methods recognize revenue on the basis of direct measurements of the value to the customer of the goods or services transferred to date relative to the remaining goods or services promised under the contract, and include methods such as surveys of performance completed to date, appraisals of results achieved, milestones reached, time elapsed, and units produced or units delivered. Input methods recognize revenue on the basis of the entity’s efforts or inputs in satisfying a performance obligation; for example, costs incurred, relative to the total expected inputs to satisfy that performance obligation.

Answer 284

enterprise performance but not directly provide information about management performance. Financial statements provide direct information about enterprise performance because the primary focus of the statements is to provide information about the financial performance of that enterprise by providing information about earnings. The same cannot be said, however, in regard to management performance. The financial statements depict only indirect information concerning management performance. (Direct information related to management performance would be provided in internal managerial performance reports but not in the external financial statements.)

Answer 285

$2,500,000 Tuition and fee revenues should be reported net of tuition discounts and allowances with the discount or allowance amount parenthetically disclosed on the face of the statement. Tuition waivers are a kind of discount that lowers net tuition received from specific students. Uncollectible accounts are recognized with the use of an allowance for government college and university accounting.

Answer 286

enterprise performance but not directly provide information about management performance. Financial statements provide direct information about enterprise performance because the primary focus of the statements is to provide information about the financial performance of that enterprise by providing information about earnings. The same cannot be said, however, in regard to management performance. The financial statements depict only indirect information concerning management performance. (Direct information related to management performance would be provided in internal managerial performance reports but not in the external financial statements.)

Answer 287

$10,250,000 Defined benefit contribution plans managed by employers are reported at fair value. At year-end, the fair value of the plan was $10.25 million. The original cost and change in value of one investment are not relevant to the year-end value. Note that this treatment is substantially different from defined benefit plans.

Answer 288

neither additional paid-in capital nor retained earnings. Assume: Par value of shares = $1,000 Original issue price = $1,200 ($1,000 par, $200 additional paid-in capital) Reacquisition price = $1,100 (1) Reacquisition using cost method: Dr. Cr. Treasury shares 1,100 Cash 1,100 (2) Reacquisition using par value method: Dr. Cr. Treasury shares 1,000 Additional paid-in capital 100 Cash 1,100 The entry under the par value method reduces additional paid-in capital (i.e., the amount is not “greater”), while retained earnings are not affected. Note: The question asks if the amount is “greater,” not just if the account is affected.

Answer 289

$27,500 FASB ASC 842-20-35-8 states, “A lessee shall amortize the right-of-use asset from the commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term. However, if the lease transfers ownership of the underlying asset to the lessee or the lessee is reasonably certain to exercise an option to purchase the underlying asset, the lessee shall amortize the right-of-use asset to the end of the useful life of the underlying asset.” Thus, Nori recognizes depreciation expenses as follows: Depreciation expense for 20X1 = (Cost - Salvage value) / Useful life = ($240,000 - $20,000) / 8 years = $220,000 / 8 = $27,500 Note: The $10,000 purchase option was included in the $240,000 acquisition cost.

Answer 290

disclosure. One of the purposes of financial statements is to provide information to help users predict the reporting entity's future cash flows and results of operations. This assessment depends, to some degree, on the users' knowledge and assessment of the risks and uncertainties involving the entity's operations. Disclosure of these risks and uncertainties is a critical component of the user's process of evaluating these variables. FASB ASC 275-10 addresses the disclosures required to facilitate a user's evaluation of an entity's risks and uncertainties.

Answer 291

$155,000 Investment in debt securities (other than those intended to be held until maturity) and investment in equity securities are reported at fair value in the balance sheet. The exceptions are marketable debt securities that a company plans to hold to maturity (reported at amortized cost) and marketable equity securities that provide the company the ability to significantly influence the investee (equity method required) or to control the investee (consolidation required). Therefore, Rim should report both at fair value of $155,000.

Answer 292

$800,000 Regardless of whether you are reporting the revenue at the fund or entity-wide level, the basic recognition criterion is the same: when all applicable eligibility requirements are met. The availability requirement does not apply with entity-wide statements, but availability does not make a difference in this case.

Answer 293

$0 At year-end, Falton should record an account receivable of $300,000 ($1,800,000 – $1,500,000) and costs and profits in excess of billings of $450,000 ($2,250,000 – $1,800,000). However, no current liability exists because costs and profits exceed billings. Journal entries: Construction in Progress 2,250,000* Cash and profit 2,250,000 Accounts Receivable 1,800,000 Progress Billings 1,800,000 Cash 1,500,000 Accounts Receivable 1,500,000 * Includes $2,000,000 of costs incurred and $250,000 of gross profit (($2,000,000 ÷ $8,000,000) × $9,000,000).

Answer 294

Hake would record a $125,000 loss. Hake would record a loss on the settlement of the lawsuit of $125,000, calculated as follows: 20X2 Payment - 20X1 Contingent Liability = 20X2 Loss $375,000 - $250,000 = $125,000 On December 31, 20X1, Hake would have recorded a contingent liability of $250,000 (the minimum estimate of loss, since no amount within the range of estimates was identified as being a better estimate that any other) in accordance with FASB ASC 450-20-30-1.

Answer 295

I and III Activities are required to be reported as enterprise funds if either I or III is true. In addition, if pricing policies of the activity establish fees and charges designed to recover costs, an enterprise fund must be used. The language describing funds as providing goods and services “on a cost-reimbursement basis” applies to internal service funds.

Answer 296

None of the answer choices are correct. Under the cost method the receipt of a cash dividend is recorded as income from investments. The investment account remains unchanged. Debit Credit Cost Method Journal Entry: Cash XX Dividend Income XX The receipt of a cash dividend is treated very differently under the equity method. Since income of the investor is recorded by the investor when reported, cash dividends are treated as a reduction in the investment account. Debit Credit Equity Method Journal Entry: Cash XX Investment in XYZ Co. XX Thus, neither method results in an increase in the investment account for a cash dividend received.

Answer 297

Purchase returns When applying the retail inventory method, one must compute the total cost and total retail amounts for goods available for sale. Some items are only included in one of these totals, sales returns and markups only go into the retail column, and freight in only goes into the cost column. Purchase returns are an adjustment to both columns.

Answer 298

$50,000 gain The gain or loss on the settlement of the ARO liability is the difference between the ARO liability on settlement date of $220,000 and the actual settlement cost of $170,000. FASB ASC 410-20-40-2 requires the initial liability of $100,000 to be increased to the expected cash flow adjusted for market risk and inflation. Since the expected cash payment for the ARO liability was $220,000, a gain on settlement of $50,000 results. Note: Accounting for ARO liability is similar to the treatment of bonds payable. The liability is initially recorded at its present value and is amortized. Amortization is recorded with a debit to accretion expense and a credit to ARO liability.

Answer 299

neither the expected rate on plan assets nor the actual return on plan assets. The discount rate for the projected benefit obligation is generally based on long-term debt interest rates. It has no direct relationship to the actual or the expected rate of return on plan assets.

Answer 300

Purchase of fixed assets Purchase of fixed assets is an example of an expenditure and reduces the excess of revenues over expenditures. Transfers between funds are recorded as “other financing sources and uses.” Proceeds from the sale of capital assets is an example of a special item. Special items are shown on the statement after the excess of revenue over expenditures.

Answer 301

$301,000 (20X5) and $275,500 (20X6). Adjusting 20X5 ending inventory results in cost at base-year prices of $300,000 ($306,000 ÷ 1.02). The $300,000 cost at base-year prices includes two layers: beginning of 20X5 layer = $250,000 and end of 20X5 layer = $50,000. The adjustment of the end of 20X5 layer to current-year prices = $50,000 × 1.02 = $51,000. $250,000 + $51,000 = $301,000 is reported for inventory at the end of 20X5. Adjusting 20X6 ending inventory results in cost at base-year prices of $275,000 ($288,750 ÷ 1.05). The $275,000 cost at base-year prices includes two layers: beginning of 20X5 layer = $250,000 and end of 20X5 layer = $25,000. Because the cost at base-year prices at the end of 20X6 is less than the cost at base-year prices at the end of 20X5 ($275,000 vs. $300,000), the layer created in 20X5 is reduced to $25,000 ($50,000 − $25,000). The adjustment of the end of 20X5 layer to current-year prices = $25,000 × 1.02 = $25,500. $250,000 + $25,500 = $275,500 is reported for inventory at the end of 20X6.

Answer 302

II only The basic government-wide financial statements include the statement of net position and the statement of activities, but not a cash flow statement. The fund financial statements include statements of cash flows for proprietary funds but not for governmental funds. The proprietary funds, except for the internal service funds, make up the business-type operations of a government. A city-owned utility is a prototypical example of a business-type activity that would be recorded in a proprietary fund. In contrast, construction of a city hall building is a general government operation that would be recorded in a governmental fund.

Answer 303

Retained earnings: $100,000 increase; Noncontrolling interest: $0 Carrying value of Palmer bonds payable $1,075,000 Less acquisition cost to Seal, Inc. 975,000 Gain to Palmer (Consolidated entity) $ 100,000 This gain would, of course, increase consolidated retained earnings. The gain is identified with the issuer of the bonds, which is Palmer in this case. Therefore, the gain has no effect on noncontrolling (minority) interest.

Answer 304

Retained earnings: $100,000 increase; Noncontrolling interest: $0 Carrying value of Palmer bonds payable $1,075,000 Less acquisition cost to Seal, Inc. 975,000 Gain to Palmer (Consolidated entity) $ 100,000 ========== This gain would, of course, increase consolidated retained earnings. The gain is identified with the issuer of the bonds, which is Palmer in this case. Therefore, the gain has no effect on noncontrolling (minority) interest.

Answer 305

Yes, as long as the design is likely to be feasible and marketable or profitable to use internally for future production Once a development project reaches the stage of a working model or prototype, and is found to be technologically feasible and financially affordable to complete, then it can be capitalized, and additional development costs added to its cost on the company books. The asset can be intended for sale or internal use, so long as it is expected to be valuable for that purpose.

Answer 306

employee stock ownership plan instruments. FASB ASC 718-10-25-2 applies to all transactions in which an entity grants shares of its common stock, stock options, or other equity instruments to its employees, except for equity instruments held by an employee stock ownership plan (as per FASB ASC 718-10-15-7).

Answer 307

$952,500 The numerator will be Net income + Interest (net of tax). Net income $600,000 Interest: Cash ($5,000,000 x .09) $450,000 Discount amortization 20,000 Tax ($470,000 x .25) (117,500) 352,500 Numerator $952,500

Answer 308

$10,000 Intercompany dividends are eliminated in consolidation. The only dividends that remain after the eliminating entries are dividends paid to noncontrolling shareholders: 10% of Dun's dividend of $100,000, or $10,000.

Answer 309

$30,000 FASB ASC 715-30-55 prescribes the amortization of prior service pension cost over the remaining service period of the employees for whom such costs are incurred. The method used when employees have varying service periods includes the calculation of the weighted-average service period. (Straight-line amortization is also permitted.) This method, similar to sum-of-the-years'-digits depreciation, results in a declining amortization expense over the expected service period. The fraction that represents the annual amortization rate has a numerator equal to the current year's equivalent years of service and a denominator equal to the total future service years for all employees. In this case, amortization of prior service cost would be calculated as follows: Future Service Year Employees Years 1 2 3 4 5 6 7 8 Preator 5 1 1 1 1 1 Frisby 6 1 1 1 1 1 1 Burnett, Gentry and Williams (8 × 3) 3 3 3 3 3 3 3 3 35 5 5 5 5 5 4 3 3 The total number of future service years is 35; the total number in the first year is 5. Year 1 amortized prior service cost is 5/35 × $210,000 = $30,000.

Answer 310

Asset amount, no effect; Liability amount, no effect Certain costs, which result in disbursements near or after the date that the landfill stops accepting solid waste and during the postclosure period, should be included in the estimated total current cost of closure and postclosure care, regardless of their capital or operating nature. Since the equipment would not be capitalized under this guideline, there would not be any effect on assets. No liabilities are created because available cash was used.

Answer 311

$900 January sales tax was paid in February since tax was over $500 ($600). $10,600 / 1.06 = $10,000 sales $10,000 x .06 = $600 tax February sales = Credit to sales / (1.00 + Tax rate) = $7,420 / 1.06 = $7,000 ``` February sales tax = $7,000 x .06 = $420 OR = $7,420 - $7,000 = $420 ``` March sales = Credit to sales / (1.00 + Tax rate) = $8,480 / 1.06 = $8,000 ``` March sales tax = $8,000 x .06 = $480 OR = $8,480 - $8,000 = $480 ``` Sales tax payable on 3/31/X1 = $420 + $480 = $900 Note: Sales tax was not paid for February sales on March 20 because the amount owed at that time ($420) was less than $500.

Answer 312

Deferred income tax expense of $286,000 The amount to be reported in the income tax section of the income statement is the deferred income tax expense based on the changes in the deferred tax accounts. The result is deferred income tax expense of $286,000 ($104,000 + $182,000). Income tax expense 286,000 Deferred tax liability 182,000 Deferred tax asset 104,000

Answer 313

As a noncurrent liability of $100,000 This temporary difference will result in additional taxes being paid in future years, so the related tax effect will be a liability. Amount of liability = Temporary difference x Future enacted tax rate = $250,000 x 0.40 = $100,000

Answer 314

$0 The first step is to determine if this transaction qualifies as a sale. Per FASB ASC 842-40-25-2, a sale has not occurred if the leaseback could be classified as a finance lease or a sales-type lease. Since the lease term is 10/11 = 90.1% of the asset’s economic life, this does not qualify for sale/leaseback treatment. Lang will not derecognize the asset and will recognize the consideration received as a financial liability.

Answer 315

Both finance leases of lessees and long-lived assets of lessors subject to operating leases FASB ASC 360-10-15-4 lists the following types of leases that are tested for impairment: Right-of-use assets of lessees Long-lived assets of lessors subject to operating leases Proved oil and gas properties that are being accounted for using the successful-efforts method of accounting Long-term prepaid assets

Answer 316

In note disclosure only If Date Co. wins the lawsuit, the award paid to Date will be a gain. FASB ASC 450-30-50-1 provides that gain contingencies should not be reflected in the accounts (i.e., accrued) but that adequate disclosure should be made in notes to the financial statements. A loss contingency would be reported by accrual for the most likely award or for the lowest amount of the range of possible awards if no amount can be considered most likely. (FASB ASC 450-20-25-4)

Answer 317

$27,500. The revenue under the lease is the $50,000 each year, and the expenses include the depreciation and the property tax for the year. The broker’s fee ($15,000) should be amortized equally based over the 10 years of the lease, or $1,500 a year. Thus, the net rental income should be $27,500: $50,000 – $12,000 – $9,000 – $1,500 = $27,500

Answer 318

Operating lease Restaurant Equipment, Inc., would classify the lease as an operating lease. Although bright lines have been removed, FASB ASC 842-10-55-2 establishes that the former rules (75% rule and 90% rule) would be a reasonable approach to use as a benchmark. The lease is for 50% (5 years/10 years) of the economic life. The present value of the lease payments is 87% ($5.3 million ÷ $6.1 million = 87%) of the fair value of the underlying asset, representing less than “substantially all” of the fair value of the asset. Without further information, this percentage would not result in the lease being classified as a sales-type lease with selling profit. Therefore, Restaurant Equipment, Inc., should classify this as an operating lease if its accounting policy adheres to the 90% rule.

Answer 319

$193,000 FASB ASC 350-20-25-3 provides that any costs of developing, maintaining, or restoring goodwill should be deducted from income when incurred. Obviously, the $80,000 expenditure falls into this category. The $200,000 of purchased goodwill should be assessed for impairment each year. Initial cost of goodwill $200,000 Less: 20X1 impairment 7,000 Unamortized amount on December 31, 20X1 $193,000

Answer 320

$60,000 When an asset may have sustained a loss in value, due to circumstances occurring by the end of the year, it must be tested for impairment. Under IFRS, the test for and measure of an impairment loss is the excess of carrying value ($500,000) above recoverable amount ($440,000). The recoverable amount is the higher of the value in use (present value of discounted future cash flows) or net realizable value (sales proceeds less cost to sell). The recoverable amount here is the value in use of $440,000, which is larger than the net realizable value of $450,000 - $16,000, or $434,000. Thus, a $60,000 impairment loss is recognized.

Answer 321

$1,250,000. FASB ASC 810-10-10-1 states: "The purpose of consolidated financial statements is to present…the results of operations and financial position of a parent company and all its subsidiaries…as if the consolidated group were a single economic entity." The consolidation adjustment does not affect any of Beni's stockholders' equity accounts: Dr. Cr. Actual entry: Investment in Carr 430,000 Cash 430,000 Consolidated adjustment: Assets (at fair value) 800,000 (1) Goodwill 30,000 (2) Liabilities 400,000 Investments in Carr 430,000 (1) Assets at fair value = $750,000 + $50,000 = $800,000 (2) Goodwill = Cash paid - (Fair market value of assets - Liabilities) = $430,000 - ($750,000 + $50,000 - $400,000) = $430,000 - $400,000 = $30,000 Carr's stockholders' equity is eliminated for consolidated financial statement purposes, but Beni's stockholder's equity was not increased. Beni simply used its assets to acquire the net assets of Carr.

Answer 322

The statistical section is not part of the basic financial statements. The statistical section of a CAFR is outside the financial section of the report and is considered to be supplementary information. The statistical tables present comparative data for several periods of time and may contain nonaccounting data.

Answer 323

$400 Forward rate available for remaining maturity of contract (30-day rate at 12/31/X1) $ .82 Less contracted forward rate (90-day future rate at 11/01/X1) .78 Difference $ .04 Multiplied by foreign currency units x 10,000 Loss on forward contract to be reported in 20X1 $ 400 ======= FASB ASC 815-25-35-15 addresses the use of hedges to control for foreign currency exposure. If a derivative qualifies as a hedge, FASB ASC 815-25-35-1 permits companies to match the timing of the gains and losses of hedged items and their hedging derivatives. For a fair value hedge, FASB ASC 815-25-35-1 permits the hedger to record the change in the fair value of the hedged item concurrently with the gain or loss on the hedging derivative. For a cash flow hedge, the effective portion of any changes in the hedging derivative's fair value is recorded in other comprehensive income until the change in the value of the hedged item is recognized in earnings. If a derivative does not qualify as a hedge, changes in its value must be reported in quarterly earnings. Speculative contracts do not quality as hedges and are still controlled by FASB ASC 830-20-35-1. For these derivatives, the change in fair value is recognized immediately in net income.

Answer 324

I and II Deferred income tax liabilities are caused by items that defer payment of taxes, which cause more taxes to be paid in later years than the income tax expense taken currently. An increase in prepaid insurance can lower taxes now by adding to the expenses deductible, and cause deferral of taxes to the future, so it would qualify a change that would increase deferred tax liabilities. An increase in rent receivable, a pushing forward of the receipt of the rent in cash (when it will be taxed), can also defer taxes to the future and add to later taxes due, so it would also increase deferred tax liabilities. An increase in warranty obligations means one is pushing forward the paying of the expense in cash (which allows the deduction), and this would lower taxes in the future, not add to the future liabilities. All deferred tax assets and liabilities are classified as noncurrent on the balance sheet.

Answer 325

The lessor defers the cost and expenses over the life of the lease for both an operating lease and a sales-type lease with no selling profit. Lessees defer and then amortize initial direct costs for both operating and finance leases. Lessees do not use a sales-type classification, only operating and finance classifications. Lessors recognize initial direct costs at inception for sales-type leases with profit but defer initial direct costs for operating, direct financing, and sales-type without profit leases.

Answer 326

North American segment, whose assets are 12% of the company's assets of all segments, and management reports to the chief operating officer FASB ASC 280-10-50-1 defines an operating segment as follows: "A reportable operating segment is a component of an enterprise: "That engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same enterprise), "Whose operating results are regularly reviewed by the enterprise's chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance, and "For which discrete financial information is available." FASB ASC 280-10-50-4 states, “Not every part of an enterprise is necessarily a reportable operating segment or part of an operating segment. For example, a corporate headquarters or certain functional departments may not earn revenues or may earn revenues that are only incidental to the activities of the enterprise and would not be operating segments.” Further, FASB ASC 280-10-50-7 requires, “Generally, an operating segment has a segment manager who is directly accountable to and maintains regular contact with the chief operating decision maker to discuss operating activities, financial results, forecasts, or plans for the segment.”

Answer 327

Original budget A budgetary comparison statement is required only for the General Fund and for each major special revenue fund. Additionally, this statement may be presented as a schedule in required supplementary information instead of as a basic financial statement. The statement must (1) be presented using the budgetary basis of accounting and (2) include columns for the original budget adopted, the final budget, and for actual amounts on the budgetary basis of accounting. The variance column, based on actual versus the revised budget, is optional.

Answer 328

prior-period adjustment resulting from the correction of an error. A change from cash-basis accounting (non-GAAP) to accrual-basis accounting (GAAP) would be considered a correction of an error. Lore Co. should report the cumulative effect of the change from cash-basis to accrual-basis accounting as a prior-period adjustment.

Answer 329

the balance in the right-of-use asset will be more than the balance in the lease liability account at the beginning of the second year of the lease. When recording expense for an operating lease, the lessee records a single amount of expense that is made up of two parts, the interest on the lease obligation and the amortization of the right-of-use asset. In computing the components of lease expense at the end of the first year, interest expense is computed and amortization expense is the difference between the lease payment and the interest expense. This means that the amortization expense will be less than the lease payment. Since the amount of amortization expense is less than the payment, the carrying value of the right-of-use asset will be greater than the lease liability because at the beginning of the second year, the lease liability was reduced by the full lease payment when the first lease payment was made.

Answer 330

Revenues and expenditures from an annual fundraising campaign The only option listed where net reporting is disallowed is revenues and expenditures from annual fundraising events because fundraising represents a major ongoing activity for not-for-profit entities. Investment revenues (gains) and expenditures (losses), provided the amount of investment expenses is disclosed on either the face of the statement of activities or in the notes, are subject to net reporting. Peripheral or incidental transactions (sale of equipment) or gains and losses outside of the entity’s control (changes in exchange rates) are allowed to be reported net.

Answer 331

the U.S. dollar. The objective of translation or remeasurement is to report the subsidiary’s income statement results in the U.S. parent’s currency—which is the U.S. dollar.

Answer 332

$293,000 Under the principle of consolidation, the parent and subsidiary are considered a single economic entity. Thus, the consolidated balance sheet reports the combined (parent plus subsidiary) asset and liability accounts. The single parent-sub entity owns all the net assets of both entities. Total stockholders' equity accounts on the consolidated balance sheet equals the total stockholders' equity of the parent plus the noncontrolling interest. Therefore, Dallas, Inc., reports total stockholders' equity account on December 31, 20X1, of $270,000 ($50,000 + $80,250 + $139,750) plus 20% of the total stockholders' equity of Style of $23,000 ($20,000 + $44,000 + $51,000), which is $293,000.

Answer 333

The relationship between the amount of value given and received For governmental units, an exchange transaction involves giving and receiving equal value in a transaction. A nonexchange transaction (such as property tax collected or grant provided) means the government receives value from another party without directly providing value or provides value to another party without directly receiving value.

Answer 334

$1,390,000 Governmental entities should recognize assets from derived tax revenue transactions in the period when the exchange transaction on which the tax is imposed occurs or when the resources are received, whichever occurs first. Revenues should be recognized, net of estimated allowances for doubtful accounts in the same period that the assets are recognized. From the entity-wide perspective, “availability” is not a criterion for recognizing revenues, so classification as “deferred” is unnecessary. Receipts current year $1,250,000 Add ending receivables 600,000 Less ending allowance for doubtful accounts (60,000) 1,790,000 Less beginning receivables (450,000) Add beginning allowance for doubtful accounts 50,000 Current-year revenue $1,390,000

Answer 335

No possibility of future gain or loss The purpose of a hedge is to reduce exposure to a particular type of risk. A perfect hedge would remove all of the risk—that is, remove the possibility of any future gain or loss.

Answer 336

Operational accountability Governmental fund reporting covers sources, uses, and balances of current financial resources, and budgetary accounting enables financial and fiscal accountability. Both fund-based and government-wide financial reporting facilitate functional accountability as both classify costs by major service or responsibility areas. Only the government-wide statement of activities reports the government's operations using all economic resources. Thus, the statement of activities is designed primarily to promote the assessment of operational accountability.

Answer 337

$0 Do not fall for this trick question. On a consolidated balance sheet no intercompany receivables (or payables) would appear. They would be eliminated in the consolidation process. This rule is stated clearly in FASB ASC 810-10-45-1 as follows: "In the preparation of consolidated financial statements, intra-entity balances and transactions shall be eliminated."

Answer 338

$50,000 This is a basic question about the allowance account for uncollectible accounts receivable. At the end of the year, this allowance account has to have, as a credit balance, the amounts included within accounts receivable that are in doubt as to collection. This amount is stated in the problem, as $50,000.

Answer 339

As a subtraction from net income in the operating activities section The amortization of a bond premium is the difference between cash interest and interest expense. Cash paid for interest is reported in operating activities. Under the indirect method, interest expense is already included in net income. Amortization of a premium on bonds payable results in the interest expense amount being less than cash paid. Because less expense has been deducted in computing income than the amount of cash paid for interest, the difference (captured in the change in the bond discount account) must be subtracted from income to reconcile to the cash provided or used for operating activities.

Answer 340

Operating expense Depreciation for capital assets that are expected to be replaced through the internal service fund is recorded on the internal service fund’s financial statements. Depreciation is recognized as an operating expense for the internal service fund because it relates to the services provided to the other funds.

Answer 341

Both the issuance of stock to acquire a new warehouse and the amount of cash paid for taxes during the period Information about all investing and financing activities of an enterprise during a period that affect recognized assets or liabilities, but that do not result in cash receipts or cash payments in the period (i.e., noncash transactions), shall be reported in related disclosures (FASB ASC 230-10-50-3). The acquisition of assets for stock is an example of this type of item. Disclosing the amount of cash paid during the period for interest and taxes is also required to be reported in related disclosures.

Answer 342

$8,000 Corporations often provide various types of stock options and other equity plans for their officers and key employees. GAAP requires that these options be accounted for under the fair value method at the grant date. The expense is based on the fair value of the option at the grant date and not the fair value of the stock because the employees are being given the option (i.e., right) to buy the stock, and not the actual shares of the corporation’s stock. GAAP requires the expense to be recognized ratably over the vesting period. The estimated compensation expense for the 5-year vesting period is $40,000 (option fair value of $8 × 5,000 options), which is allocated ratably over the 5-year period. The company should report $8,000 ($40,000 ÷ 5 years) compensation expense for year 1 through year 5, assuming no employees forfeit their options.

Answer 343

Measurement focus: Economic resources; Basis of accounting: Accrual GASB 1600.103 states that the financial statements prepared for government-wide reporting “should be prepared using the economic resources measurement focus and the accrual basis of accounting. Revenues, expenses, gains, losses, assets, deferred outflows of resources, liabilities, and deferred inflows of resources…should be recognized when the exchange takes place.” This contrasts with governmental fund accounting, which recognizes transactions when cash is received or disbursed or expected to be received or disbursed within a short time.

Answer 344

75 days Annual 10-K reports are due within 75 days for fiscal years for accelerated filers as defined in 17 CFR 240.12b-2. The requirement is 90 days for other filers. The deadline for filing quarterly reports (10-Q) is 40 days for accelerated filers

Answer 345

A schedule showing the original budget, the final appropriations budget, and actual inflows, outflows, and balances on a budgetary basis The budgetary comparison schedule should present both (a) the original and (b) the final appropriated budgets for the reporting period as well as (c) actual inflows, outflows, and balances, stated on the government's budgetary basis. A separate column to report the variance between the final budget and actual amounts is encouraged, but not required. (GASB 2400.102) Note: SLGs (state and local governments) have the option of reporting the budgetary comparison schedule for the general fund and for each major special revenue fund that has a legally adopted budget as part of the basic financial statements instead of required supplementary information.

Answer 346

Statement of cash flows The key to this question is that this is a not-for-profit entity, not a government. The basic financial statements for a not-for-profit entity are statement of financial position (like a balance sheet), statement of activities, statement of cash flows, and for voluntary health and welfare entities, a statement of functional expenses.

Answer 347

when promises to give cash are initially recognized, an expense for estimated uncollectible promises should be recorded. NFPs should not record an expense for estimated uncollectible promises when promises to give are initially recognized. The other three treatments are proper. FASB ASC 958-605-30-8 allows NFPs to use the fair value at the date a promise to give securities was initially recognized even if the contribution will not take place for several years. When promises to give cash are initially recognized, they could be based on the present value of estimated future cash flows (FASB ASC 958-605-55-22). When NFPs recognize promises to give, they create an Allowance for Uncollectible Promises (or Contributions) but do not recognize Bad Debt Expense as a business does. Instead, the NFP recognizes the net realizable value of the contribution revenue (FASB ASC 958-605-30-4).

Answer 348

contra current asset account. The current asset account maintaining an inventory value for the costs and profits recognized so far on the contract has a contra account of progress billings, lowering its carrying value. If the billings exceed the construction in process, then a current liability can exist instead.

Answer 349

$95,000 Under FASB ASC 270-10-45-4, interim financial reports should be based on the principles, practices, and policies used in the preparation of the last annual report. ``` Property taxes ($60,000 x 3/12) $15,000 Major repairs ($240,000 x 3/9) 80,000 Total $95,000 ```

Answer 350

Hart: $10,000; Maxx: $7,827 FASB ASC 310 provides that notes receivable stating either no interest or an unreasonably low interest rate be reported at their present value computed using an appropriate interest rate if the original maturity date of the note exceeds one year. The Hart note would be reported at its face amount of $10,000 since it matures within the current 1-year accounting period. The correct value for reporting the Maxx note is: Present value of Maxx note = Maturity amount x Present value factor = ($10,000 + ($10,000 x 3% x 5 years)) x .6806 = ($10,000 + $1,500) x .6806 = $7,827

Answer 351

$50,000 The bonus payable to the CEO has been earned by the CEO as of December 31, 20X1, and should be reported as a liability in the balance sheet at that date. The company does not have a liability for dividends payable until (and unless) the board declares the dividend as anticipated on January 16, 20X2. Prior to that date, the company has no legal obligation to pay the dividend to its stockholders.

Answer 352

$27,000 Ball's year-end income statement should include $27,000 as foreign exchange loss, calculated as follows: Foreign currency loss on goods purchased ($90,000 - $96,000) $ 6,000 Loan principal foreign currency loss ($500,000 - $520,000) 20,000 Loan interest foreign currency loss ($25,000* - $26,000) 1,000 Total loss $27,000 * Interest in U.S. dollars: $500,000 × 0.10 × 1/2 year = $25,000

Answer 353

Governmental funds, yes; Proprietary funds, yes Consider that if an item impacts operations, then it should be a factor in the final results of operations. Governmental and proprietary funds require a statement of revenues and expenditures; fiduciary funds do not.

Answer 354

$26,400 Of the $90,000 of contributions, $60,000 designated for use during the current year would have been collected in full by the date of the financial statements issued as of the end of the year. This $60,000 would be reported in the statement of activities as unrestricted support. Of the remaining $30,000, 12% or $3,600 is estimated to be uncollectible. Therefore, the $26,400 anticipated to be collected in the subsequent year is reported in the statement of activities as restricted support (due to the time restriction).

Answer 355

nonoperating revenues. Proprietary funds of governments, including enterprise funds, report unrestricted grants and restricted operating grants as nonoperating revenues. Restricted capital grants are reported as capital contributions. Neither contributed capital nor expenditures are reported for proprietary funds.

Answer 356

In operating activities as an addition to income Interest paid would be an expense included in the determination of net income, and therefore a cash outflow from operating activities. Amortization of bond discount is noncash interest expense. Net income must be increased by noncash expenses that did not result from a cash outflow.

Answer 357

$8,000 The balance sheet needs to include the amount of unpaid interest accrued on the outstanding principal up until the balance sheet date. After the first installment on the principal was made, there was still $100,000 of the debt outstanding for a full year. Note receivable balance on June 30, 20X0 $150,000 Principal collected in 20X1 − 50,000 Note receivable balance on July 1, 20X1 $100,000 Times interest rate × .08 Interest receivable June 30, 20X2 $ 8,000

Answer 358

$178,000 Reported retained earnings (12/31/X1) $150,000 Correction of error: INCREASE in income $40,000 Less income taxes (30%) 12,000 Prior-period adjustment 28,000 Adjusted beginning retained earnings $178,000

Answer 359

cash proceeds received. When applying group or composite depreciation methods, when one sells an asset, the cost of the asset is removed, and the accumulated depreciation is assumed to be equal to the difference between cash received and cost. When the asset cost and this accumulated depreciation amount are both removed, the carrying amount of the asset accounts is decreased by the cash proceeds exactly.

Answer 360

purchase common stock at the average market price. Exercise of options and warrants is assumed at the beginning of the period. Proceeds are assumed used to purchase common stock at the average market price during the period. The incremental shares are included in the denominator of diluted earnings per share (EPS).

Answer 361

Increase in unrestricted revenues, gains, and other support When resources are under control of the governing board and not specifically restricted by an outside donor, the resources are considered unrestricted and the resulting income is unrestricted revenue. The designation “board-restricted net assets” does not exist.

Answer 362

notes to financial statements. The Statement of Financial Accounting Concepts (SFAC) 8, Chapter 8, Notes to Financial Statements, issued in 2018, provides guidance regarding relevant supplemental or further explanatory information provided in the notes about the information appearing on the face of the financial statements. This guidance is for the benefit of existing and potential investors, lenders, and others to help them make decisions regarding resources. The objectives of financial reporting, qualitative characteristics, and elements of financial statements are addressed in other SFAC statements.

Answer 363

Quoted market prices Investments in debt securities should be reported at market prices because that is the source of readily available fair value information. Discounted expected future cash flows are required to value financial assets for which there is no market that can provide fair value information. Historical cost is used to value acquisitions of property, plant, and equipment. Liquidation values generally are used when liquidation of an entity is imminent.

Answer 364

A detailed description of the plan, including employee groups covered The FASB requires extensive disclosures regarding pensions. Among these are the components of net periodic pension cost and the estimated plan contributions for the year following the latest year reported in the statement of financial position. The FASB requires, for each annual statement of financial position presented, “the amounts in accumulated other comprehensive income that have not yet been recognized as components of net periodic benefit cost, showing separately the net gain or loss, net prior service cost or credit, and net transition asset or obligation.” Note that service cost is presented along with compensation expense, while the remaining items of net periodic pension cost are presented on a separate line item.

Answer 365

Bond Anticipation Notes Payable Bond anticipation notes are included as general long-term liabilities. The amount would never be revenue or a deferred revenue as the amount is due to be repaid at some point.

Answer 366

As a change in accounting estimate, not requiring restatement of prior periods According to GASB 1400.107, footnote 9, a change from depreciation to the modified approach should be reported as a change in an accounting estimate, and this change would not require a restatement of prior periods.

Answer 367

The statement of cash receipts and disbursements The statement of cash receipts and disbursements would likely be found in a set of financial statements prepared under the cash basis of accounting, a special purpose framework. A statement of operations, financial position, and statement of comprehensive income would all likely be found in financial statements prepared under accrual accounting following U.S. GAAP.

Answer 368

Statement of changes in fiduciary net position Investment trust funds are one of the fiduciary fund types for state and local governments. Two financial statements are required for fiduciary funds—a statement of fiduciary net position and a statement of changes in fiduciary net position.

Answer 369

a 10% stock dividend. FASB ASC 505-20-30-3 provides that for issuances of additional shares less than 20% or 25%, the issuing corporation should transfer from earned surplus (retained earnings) “an amount equal to the fair value of the additional shares issued.” Thus, retained earnings should be charged for an amount equal to the market value of the shares issued in a 10% stock dividend.

Answer 370

lease rather than purchase operating facilities. Management must evaluate whether there are conditions and events, considered in the aggregate, that raise substantial doubt about an entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. Management's plans to deal with the current situation could mitigate the adverse effects. Examples of these plans would be: plans to dispose of assets, plans to borrow money or restructure debt, plans to reduce or delay expenditures, or plans to increase ownership equity. If management planned to lease operating facilities rather than purchase them, they would be holding off on acquiring debt to purchase a capital asset. This situation may alleviate some of the financial pressure. Repurchasing the company's stock at a price below its book value would decrease ownership equity and involve an outlay of cash. Issuing stock options to key executives would increase ownership equity, but stock options involve a right to purchase stock at a certain price in the future. These options would cost the company money. Accelerating the due date of an existing mortgage would free the company from debt and reduce interest expense, but it would take a great deal of cash to do so. None of these options would be a positive move for a company with a going concern issue.

Answer 371

$50,000 Because Macklin had performed all services required to earn the initial franchise fee, the refund period had passed, and operations were started in the current year, it should recognize all of the initial franchise fee as revenues unless collectibility of the $40,000 receivable is not reasonably assured. The question does not raise any concerns about collectibility of the receivable.

Answer 372

$58,500 The company should report pretax income of $58,500 following the error corrections. To correct the errors discovered by the auditor in the current year, the company would make the following two entries that increase expenses and lower net income: DR Cost of goods sold 30,000 CR Inventory 30,000 DR Depreciation expense 64,000 CR Accumulated depreciation 64,000 The net effect of these two entries decreases pretax income by $94,000 ($30,000 + $64,000) for an adjusted pretax income of $58,500 ($152,500 − $94,000).

Answer 373

The discount rate is the rate that the lessee would expect to pay a bank if funds were borrowed to buy (rather than lease) the asset. The rate that the lessee would expect to pay a bank if funds were borrowed to buy (rather than lease) the asset is the lessee’s incremental borrowing rate, not the discount rate. The discount rate is the rate implicit in the lease and is the rate that the lessor “desires” to achieve a certain lease payment. If the lessee does not know the implicit rate, they are allowed to use the incremental rate instead.

Answer 374

$428,000 Conn should report $428,000: Beginning retained earnings as originally reported $400,000 Over expense of $40,000 – Tax of 30% ($12,000) 28,000 Corrected beginning retained earnings $428,000

Answer 375

The economic life of the asset With a finance lease resulting from a purchase option, the lessee amortizes the right-of-use (ROU) asset over the ROU asset’s useful life.

Answer 376

$3,000 Cash payments to purchase equipment are outflows from investing activities. The $3,000 down payment is an investing activity outflow. The $27,000 financed and the principal payments are financing activities.

Answer 377

$17,310,000 The government-wide statement of net position is one of two required government-wide statements (the other is the government-wide statement of activities). Remember that governmental activities and business-type activities are reported separately. Governmental activities typically include (1) all governmental fund assets and liabilities, (2) general capital assets (including infrastructure such as streets, roads, and bridges), (3) general long-term liabilities, and (4) the assets and liabilities of internal service activities. Therefore, net investment in capital assets is $17,310,000 ($31,000,000 − $9,500,000 + $3,420,000 − $1,310,000 − $6,300,000). Short-term assets of $1,500,000 and short-term liabilities of $1,100,000 are not included.

Answer 378

discrete presentation. Because the school district is financially dependent on the city, it is considered a component unit, not a separate primary government. Component unit financial information is generally included in the financial statements of the primary government but presented separately from the financial data of the primary government. Because only two of the seven school board seats are occupied by council members, the governing body of the school board is not “substantially the same” as the city council. Thus, the blending method is not required. Discrete presentation should be used unless the financial activities of the two entities are so intertwined as to make them substantially the same entity. GASB 2100.110–.111

Answer 379

sales to external customers and intersegmental sales or transfers. After an enterprise has identified its operating segments (including those that represent an aggregation of two or more separate segments), it must report separately information about each operating segment that meets any one or more of the following tests: Revenue test: If its revenue is 10% or more of the combined revenue of all operating segments (revenue includes both sales to external customers and intersegmental sales or transfers) Profitability test: If the absolute amount of its reported profit or loss is 10% or more of the greater, in absolute amount, of: the combined reported profit of all operating segments that did not report a loss or the combined reported loss of all operating segments that did report a loss Asset test: If its assets are 10% or more of the combined assets of all operating segments

Answer 380

$390,000 Under the cash method of accounting, revenue is recognized when received in the form of cash, and expenses are recognized when paid in cash. The owner’s capital account maintains a record of the owner’s investment and the earnings for the owner, and is lowered by drawings. Capital-Smith balance January 2, 20X1 $350,000 Add: Net income 60,000 Subtotal $410,000 Deduct: Withdrawals (20,000) Capital-Smith balance December 31, 20X1 $390,000

Answer 381

fair value of plan assets exceeds the projected benefit obligation for the company's overfunded plans. The fair value of plan assets is the amount that a pension plan(s) could reasonably expect to receive for an investment in a current sale between a willing buyer and a willing seller. An entity must recognize on its balance sheet the full overfunded or underfunded status of its defined benefit pension plans. The overfunded or underfunded status is the difference between the fair value of the plan assets and the projected benefit obligation. The right to offset multiple plans does not exist; therefore, a pension asset is the total by which the fair value of plan assets for overfunded plans only exceeds the total projected benefit obligation for just those overfunded plans. Underfunded plans would be shown separately.

Answer 382

$88,000 Franchise fee revenue is recognized when all material services or conditions relating to the sale have been substantially performed or satisfied by the franchisor. In this case, the services have not been performed. Consequently, the initial fee is still unearned. Paid at signing $40,000 Present value of note 48,000 Initial and unearned franchise fee $88,000

Answer 383

Relevance The service efforts and accomplishments (SEA) performance of governmental entities is primarily measured by output, outcome, and efficiency measures. These measures report what services the entity has provided, whether those services have achieved the objectives established, and what effects they have had upon the recipients and others. SEA performance information measures should meet the characteristics of relevance, understandability, comparability, timeliness, consistency, and reliability. All of these measures, except for understandability and relevance, can be objectively examined. Understandability and relevance will be subject to the user's own interpretation. As understandability is not listed in the answer choices, only relevance can be the proper answer.

Answer 384

$115,000 The $100,000 contribution is meant by the donor to remain invested, so the balancing equity in the accounting equation would be net assets with donor restrictions. The $15,000 of interest earned is meant by the donor to be used for a specific purpose, to fund scholarships. The scholarships will be awarded in Year 3 although the interest was earned in Year 2. For the statement of financial position, therefore, the $15,000 of interest earnings is also considered net assets with donor restrictions since the restriction on use will not be released until Year 3. The total amount of net assets with restrictions is $115,000.

Answer 385

Events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued or are available to be issued. Under FASB ASC 855-10, there are two types of subsequent events: The first type consists of events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements (that is, recognized subsequent events). The second type consists of events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date (that is, nonrecognized subsequent events).

Answer 386

$340,000 The $10,000 patent cost will be capitalized as an intangible asset in accordance with the provisions of FASB ASC 350-30-25-1. The remaining costs are considered to be research and development costs, as defined in FASB ASC 730-10-55-1. Special developmental equipment and prototypes are addressed in FASB ASC 730-10-55-1. They are considered to be research and development costs which “shall be charged to expense when incurred.” Thus the entire $340,000 ($60,000 + $200,000 + $80,000) would be expensed.

Answer 387

$155,000 For 20X2: Beginning Ending accounts + Sales - Collections = accounts receivable receivable $50,000 + Sales - $175,000 = $30,000 Sales = $175,000 + $30,000 - $50,000 Sales = $155,000

Answer 388

1,575,000 Earnings per share (EPS) is a comparison of the earnings applicable to common stock with the number of shares of common stock of that enterprise. The concept relates only to common stock and should be thought of as “earnings per common share.” Assuming that there is no preferred stock outstanding, the fundamental EPS computation is: EPS = Net income Weighted-average common shares outstanding Weighted-average common shares (WACS) outstanding is determined by relating (a) the portion of time within a reporting period that common shares have been outstanding to (b) the total time in that period. In computing WACS, retroactive application is given to stock splits, stock dividends, and shares of common stock issued in a business combination accounted for as a pooling of interests (i.e., they are treated as if they were outstanding for all of any periods presented). WACS is computed as follows: Total # of # of Months Weighted # of Shares Shares Outstanding Average January 1 1,200,000* 1,200,000 3/12 300,000 April 1 600,000* 1,800,000 6/12 900,000 July 1 - - - October 1 (300,000) 1,500,000 3/12 375,000 WACS 1,575,000 * Adjusted for 3-for-1 stock split on July 1

Answer 389

No required reportable event This designation of the board as to use of the income from investments is neither a change in restrictions nor a change in revenue/expenses. Thus, it is not a required reportable event. Only donors can place restrictions, not the board.

Answer 390

$106,400 The receivable should initially be recorded at the spot rate on the date of the transaction (1,900,000 pesos × $0.056 = $106,400). When Rafia receives payment on March 3, the 1,900,000 pesos will equal $95,000 (1,900,000 × $0.05) in U.S. dollars, not the $106,400 U.S. dollars for which the accounts receivable was originally recorded. The journal entry on March 3 is: Cash 95,000 Foreign currency transaction loss 11,400 Accounts receivable 106,400

Answer 391

$900,000 Special revenue funds are used to account for resources raised from revenues that are either restricted or committed for expenditure for specific general government purposes other than capital outlay or debt service. Capital projects funds are used to account for and report financial resources that are restricted, committed, or assigned to expenditure for capital outlays. The sidewalks are capital in nature and would not be part of a special revenue fund but of a capital fund, whereas the road repairs are not capital but maintenance.

Answer 392

$2,500 This payment is partially an exchange transaction and partially a contribution and the two parts should be accounted for separately. Oz would recognize ticket sales revenue for the 25 tickets ($2,500) and recognize the balance as contribution revenue.

Answer 393

8 to 1. The price-earnings ratio is P/E = Stock price ÷ EPS (earnings per share). The net earnings per common share is $9: ($1,200,000 – $300,000) ÷ 100,000 = $9 Price-earnings ratio: $72 ÷ $9 = $8

Answer 394

$510,000 Some of the items in the accounts payable need to be removed, and others added. The advance should be a deposit (not in accounts payable), and the checks not sent until January were still owed in December. Unadjusted December 31, 20X1, accounts payable $360,000 Add: Debit balance in Ross account (need to reclassify as a prepaid asset) 50,000 Checks recorded but not mailed 100,000 Adjusted accounts payable balance to be reported on December 31, 20X1 $510,000

Answer 395

1.79 The current ratio as of December 31 is 1.79: Current ratio = Current assets / Current liabilities = ($300,000 + $350,000 + $600,000) / $700,000 = 1.79

Answer 396

Nonoperating revenues Revenues from state appropriations for other than capital-asset-related purposes are recorded as nonoperating revenues. Capital contributions and other financing sources are reported in other revenues, expenses, and transfers.

Answer 397

property taxes are recorded. Crediting the revenues control account signifies either that cash has been collected, or that a valid receivable exists. In practice, when property taxes are levied, a receivable is created. The debit to property taxes receivable is offset by a credit to revenues to the extent that the taxes are “susceptible to accrual;” that is, both measurable and available to pay liabilities of the fiscal period. (To the extent that receivable items do not meet the susceptible to accrual criteria, deferred revenues, a liability, is credited.) Budgetary events and accounts (the other answer choices) do not affect the revenue control account.

Answer 398

$798,000 This building is treated as a leasehold improvement. Although the land lease is for 21 years, the building will be in use for 20 years; thus, the depreciation period for the building is 20 years: Cost / Life = $840,000 / 20 years = $42,000/year Building cost - Depreciation = Carrying value of building $840,000 - $42,000 = $798,000

Answer 399

126,500 Weighted-average number of shares is determined by relating (a) the portion of time within a reporting period that common shares have been outstanding to (b) the total time in that period. In computing weighted-average number of shares (also called weighted-average common shares), retroactive application is given to stock splits, stock dividends, and shares of common stock issued in a business combination accounted for as a pooling of interests (i.e., they are treated as if they were outstanding for all of any periods presented). Shares outstanding at 1/1 + Stock dividend at 3/31 124,000 x 12 = 1,488,000 Stock issued at 6/30 5,000 x 6 = 30,000 1,518,000 Divided by number of months / 12 Weighted-average number of common shares 126,500

Answer 400

$500. Revenue for long-term contracts is recognized over time when any one of the following criteria is met: the customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs; the entity’s performance creates or enhances an asset, such as work-in-process (WIP), that the customer controls as the asset is created or enhanced; or the entity’s performance does not create an asset with an alternative use to the entity, and the entity has an enforceable right to payment for performance completed to date. This arrangement qualifies for revenue recognition over time because the customer consumes the benefit of the seller's service as the seller provides it. Therefore, Remy would recognize revenue of $500 ($2,400 × 5/24 of the contract duration) in 20X7.

Answer 401

$365,000 All deferred tax liabilities (and deferred tax assets) are classified as noncurrent. All of the remaining items listed are considered current as they are due and payable within the next year. Accounts payable $ 80,000 Bonds payable 300,000 Discount on bonds payable (15,000) Total $365,000

Answer 402

IDC include items such as commissions and payments made to current tenants to obtain the lease. IDC are capitalized (not expensed) and include only those costs that entity would not have incurred if the lease had not been entered into (i.e., must be incremental costs, not internal, such as commissions and payments made to current tenants to obtain the lease). The lessee (not the lessor) includes IDC in the measurement of a right-of-use (ROU) asset.

Answer 403

$60,000 Cash flows from investing activities involve the use and receipt related to nonoperating assets (i.e., property, plant, and equipment; equity and debt securities; notes receivable; etc.). Cash provided by investing activities is found in an identical manner under the direct or indirect method of preparing the statement of cash flows. In this example, only two items would be classified as investing activities: the equipment purchase and equipment sale. The sale resulted in a $100,000 cash inflow and the purchase resulted in a $40,000 cash outflow, for a net cash provided amount $60,000 ($100,000 inflow − $40,000 outflow). The change in accounts receivable and accounts payable balances would be captured in the operating section of the statement of cash flows. The change in notes payable would be captured in the financing section.

Answer 404

I and III only The FASB requires that a public entity shall disclose the approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets (before allocation of valuation allowances). A nonpublic entity shall disclose the types of significant temporary differences and carryforwards but may omit disclosure of the tax effects of each type. An entity shall disclose the amounts and expiration dates of operating loss and tax credit carryforwards for tax purposes. There is no requirement to disclose permanent differences.

Answer 405

only include amounts to which the entity has rights under the current contract. The transaction price should only include amounts to which the entity has rights under the current contract; which is to say, the transaction price does not include estimates of consideration from the future exercise of options for additional goods or services or from future change orders. Until the customer exercises the option or agrees to the change order, the entity does not have a right to consideration. Note that the amounts to which the entity has rights under the current contract can be paid by any party (that is, not only by the customer). When determining the transaction price, an entity should consider variable consideration, including constraining estimates; any significant financing component in the contract; noncash consideration; and any consideration payable to a customer. At the end of each reporting period, an entity should update the transaction price.

Answer 406

$0 Blair County would not record either of these sources of monies in its special revenue funds. The proceeds of short-term notes to be used for advances to private-purpose trust funds would be in a private-purpose trust fund and the amount received from the long-term debt to be used for a major capital project would be in a capital projects fund.

Answer 407

Fund balance unassigned 132,000 Fund balance--committed 132,000 The correct answer is: Fund balance unassigned 132,000 Fund balance--committed 132,000 It appears the general fund started with a fund balance of $132,000 if it held only enough cash to pay for the six vehicles delivered in October, November, and December. The fund balance would have been debited $264,000 when expenditures were closed and outstanding encumbrances removed at year-end, leaving a debit balance of $132,000. The remaining encumbered amount would be disclosed as the fund balance category called “Fund balance—committed.” (The city simply reversed encumbrances at year-end, and then displayed the ending fund balance in two amounts—committed and unassigned.) Further, the amount of fund balance set aside due to the outstanding encumbrances could be labeled “Fund balance—assigned” as well as “Fund balance—committed” depending on whether the original agreement to purchase the vehicles had been approved at the highest level of the government. The remaining fund balance, a deficit amount in this case, would be labeled “unassigned.” The following answer choices are not correct because encumbrances would be removed from the books at year-end: Encumbrances 132,000 Reserve for encumbrances 132,000 Encumbrances 264,000 Reserve for encumbrances 264,000 The second answer choice above is also not correct because it shows the original encumbrance value for all 12 vehicles although 6 have already been delivered. The remaining answer choice is not correct because the debits and credits are reversed: Fund balance--committed 264,000 Fund balance--unassigned 264,000

Answer 408

The bonds sold with two months of accrued interest (October and November), or $2,000 (6% × $200,000 × 2/12). The journal entry to record issuance of bonds on December 1, 20X5, is as follows: Dr. Cr. Cash ($200,000 + $2,000 + $4,000) 206,000 Bonds Premium (200 × $1,000 (1.02 − 1.00)) 4,000 Bonds payable (200 × $1,000) 200,000 Interest payable [(2/12) × ($200,000 × .06)] 2,000 Following the bond issuance on December 1, 20X5, Honeyberry should report the following: Face amount of bonds $200,000 Plus: Bond premium 4,000 Bonds payable, including premium $204,000

Answer 409

internally generated cash flow projections for a related asset or liability. Based on the following definition, “internally generated cash flow projections for a related asset or liability” is the only answer choice not included in Level 2 observable inputs. "If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 2 inputs include the following: "Quoted prices for similar assets or liabilities in active markets "Quoted prices for identical or similar assets or liabilities in markets that are not active "Inputs other than quoted prices that are observable for the asset or liability, for example: "Interest rates and yield curves observable at commonly quoted intervals "Implied volatilities "Subparagraph superseded by Accounting Standards Update No. 2011-04 "Subparagraph superseded by Accounting Standards Update No. 2011-04 "Credit spreads "Subparagraph superseded by Accounting Standards Update No. 2011-04 "Market-corroborated inputs." FASB ASC 820-10-35-48

Answer 410

the degree of nonperformance risk. SFAC 8 provides a summary of potential additional disclosures. For assets, the following items should be disclosed: the nature, quality, and location of the asset; future cash flows; relation to other line items; and significant contractual, statutory, regulatory, or judicial restrictions. The degree of nonperformance risk of the asset is not one of the suggested disclosures.

Answer 411

$298,000 Duke should report $298,000, calculated as follows: Reported cost of goods sold for 20X1 $270,000 Add increase in inventory ($60,000 − $45,000) 15,000 Decrease in accounts payable ($39,000 − $26,000) 13,000 Cash paid to suppliers in 20X1 $298,000

Answer 412

$19,000. In the bonus-to-new-partner method, one needs to compute the total value now for the partnership, whereupon the new partner’s capital account will be based on the new partner’s percentage of the total just computed (even if the new partner’s contribution does not seem to justify the amount). Total capital of new partnership ($60,000 + $20,000 + $15,000) $95,000 Times capital credit percentage to Grant x .20 Equals capital credit allowed to Grant $19,000 ======= Note: Grant is given a “bonus” equal to $4,000, the excess of his $19,000 capital credit over the $15,000 fair value of land invested.

Answer 413

major fund reporting requirements do not apply to internal service funds. Major fund reporting requirements do not apply to internal service funds. Therefore, they are usually combined for financial reporting and presented individually with combining statements. The other answer choices are not sufficient explanations for the town's presentation of the internal service fund financial information.

Answer 414

$125,000 Summary journal entries: Dr. Cr. Jan. 5 Cash (20,000 x $15) 300,000 Additional paid-in capital (20,000 x ($15 - $10)) 100,000 Common stock (20,000 x $10) 200,000 July 14 Treasury stock (5,000 x $10) 50,000 Additional paid-in capital (5,000 x ($15 - $10)) 25,000* Retained earnings (5,000 x ($17 - $15)) 10,000 Cash (5,000 x $17) 85,000 Dec. 27 Cash (5,000 x $20) 100,000 Additional paid-in capital (5,000 x ($20 - $10)) 50,000 Treasury stock (5,000 x $10) 50,000 Balance of additional paid-in capital 12/31/X1 = $100,000 - $25,000 + $50,000 = $125,000 * (5,000 shares / 20,000 shares) x $100,000 = 25% x $100,000 = $25,000 OR * 5,000 shares x ($15 original issue price per share - $10 par value share) = $25,000

Answer 415

$12,500 Contribution revenues and assets or expenses should be reported for donated services if: special skills are required to perform the service, the individual providing the service has those special skills, and the organization would have to buy the services if they were not donated. Therefore, $12,500 would be recorded as contribution revenue ($8,000 + $4,500 = $12,500).

Answer 416

$1,680,000 Because Magnolia will recognize revenue over time, the amount of revenue recognized in 20X3 is based on the costs incurred to-date relative to the total expected costs. The computation of revenue to be recognized is as follows: $1,456,000 ÷ ($1,456,000 + $3,744,000) = 0.28. This is the estimated progress toward completion. The estimated progress toward completion is multiplied by the total contract price to compute the amount of revenue to be recognized: $6,000,000 × 0.28 = $1,680,000.

Answer 417

Cash of $450,000 and a liability of $375,000 Cash bank accounts from the same bank can generally be offset so that accounts that are overdrawn can be netted against accounts with natural positive balances. In this problem the total amount of cash from the California bank is $450,000 ($500,000 + $50,000 + $300,000 – $400,000). This net positive amount cannot be offset or combined with the balances in other banks, such as Sedona Bank. Sedona Bank has an overdrawn balance of $375,000, representing a liability to the company. Negative cash balances are liabilities because companies must repay the bank the overdrawn balance. Therefore, the bank account balances would be cash of $450,000 and a liability of $375,000.

Answer 418

Operating Activities: $500,000; Investing Activities: $0; Financing Activities: $200,000 The statement of cash flows prepared by a not-for-profit entity uses the standard FASB categories. Unrestricted contributions are reported as operating activities while contributions restricted for long-term purposes (i.e., plant acquisitions) are reported as financing activities.

Answer 419

Net assets without donor restrictions The FASB states that a statement of activities shall report expenses as decreases in net assets without donor restrictions.

Answer 420

Expenditures control The general fund records expenditures rather than expenses. The entry to record the salaries and wages must, therefore, be made to expenditures control. Salaries and wages are generally not encumbered. Since they are controlled by civil service boards and payroll procedures, the amounts and timing are predictable. Expenditures control 800,000 Salaries and wages payable 800,000

Answer 421

$66,500 This is a finance lease, and the lease liability for the lessee at the beginning of the lease is based on the present value of the lease payments, including the purchase at the end of the lease, discounted to their present value (at the beginning of the lease) based on the implicit interest rate specified in the lease itself. Thus, the lease liability here is based on the $10,000 rental payments each year, plus the $10,000 purchase at the end of the 10th year. The present value of both of these items at the beginning of the lease, based on a 12% interest rate would be the $10,000 rent × 6.328 (the present value of an annuity due for 10 periods at 12%) = $63,280. Add this amount to the $10,000 × 0.322 (the present value of $1 at 12%, for 10 periods) = $3,220, and the two amounts add to $66,500.

Answer 422

$73,000 Employees were paid through Friday, December 26, 20X1. Salaries were unpaid for Monday, December 29 through Wednesday, December 31 (three days). Accrued salary at 12/31/X1 (3/5 x $80,000) $48,000 Accrued vacation pay for 20X1 25,000 Total Accrual at 12/31/X1 $73,000 Balance at December 31, 20X0, ($20,000) is not used in this computation. The 20X0 accrual amounts would have been used during 20X1.

Answer 423

December 31, 20X1: Overstated; January 2, 20X7: No effect When the bond’s yield requires a discount, the bond’s interest expense is based (early on) on a lower principal, and thus the expense applying straight-line would be higher (it is an average expense for the term). The discount amortization would be too high for the first year (overstating bond carrying value), but under both methods at the end of the term, the carrying amounts will be the bond face amount. Carrying amount on 1/2/X1 = $1,000,000 - $150,000 = $850,000 Amortization of discount: ``` Using straight-line = $150,000 / 6 yrs = $25,000 / yr. Using effective interest = (0.12 x $850,000) - (.08 x $1,000,000) = $22,000 Carrying amount on 12/31/X1: ``` Using straight-line = $850,000 + $25,000 = $875,000 Using effective interest = $850,000 + $22,000 = $872,000 Overstatement of carrying value when using straight-line = $875,000 - $872,000 = $3,000 Over the 6-year life of the bonds, the same total discount amortization will occur under each method. The bond carrying amount on January 2, 20X7, will be the maturity value regardless of the amortization method. Thus, on December 31, 20X1, the bond carrying value will be overstated if straight-line amortization of discount is used but on January 2, 20X7, there will be no effect from its use.

Answer 424

Governments should only present that information needed to support their analysis of financial position and results of operations prescribed by GASB Statement 34 for MD&A. GASB 2200.109, which codifies elements of GASB Statement 34, indicates that MD&A “should be confined to the topics discussed” in the included list. Footnote 8 adds that information about other than the prescribed topics should be provided elsewhere in the financial statements.

Answer 425

Current cost/constant dollar FASB ASC 255-10-20 describes current cost/constant dollar accounting as "a method of accounting based on measures of current cost or lower recoverable amounts in units of currency, each of which has the same general purchasing power." These statements include adjustments for both specific price changes and general price-level changes.

Answer 426

Not reported FASB ASC 230-10-45-1 states: "A statement of cash flows shall report the cash effect during a period of an entity's operations, its investing transactions, and its financing transactions." It is further noted that these are the “same amounts as similarly titled line-items or subtotals shown in the statements of financial position as of those dates.” Since Mend's policy is to treat these investments as cash equivalents, the purchase would not be reported in the statement of cash flows.

Answer 427

9.0 to 1. The times interest earned ratio is income before interest expenses and taxes divided by interest expense. In this question, that would be the operating income prior to either of those expenses, or $900,000 divided by the interest expense of $100,000, giving an answer of 9.0 to 1.

Answer 428

Special revenue fund Governmental funds finance and account for general government activities, such as police and fire protection, courts, inspection, and general administration, and use the flow of current financial resources measurement focus and the modified accrual basis of accounting. Governmental funds include the general fund, special revenue fund, capital projects fund, debt service fund, and permanent funds. Proprietary funds finance and account for a government’s self-supporting business-type activities (e.g., utilities) and use the flow of economic resources measurement focus and the accrual basis of accounting. Proprietary funds include enterprise funds and internal service funds. Fiduciary funds account for resources (and any related liabilities) held by a government entity for the benefit of others (not to support the government’s programs) in a trustee capacity (trust funds). Changes in net position of trust funds are reported as additions and deductions, using the flow of economic resources measurement focus and the accrual basis of accounting. Fiduciary funds include private-purpose trust funds, investment trust funds, pension trust funds, and custodial funds.

Answer 429

$2,892 The amount of interest expense the lessee would record in conjunction with the second quarterly payment at October 1 is $2,892: Initial balance, July 1 (given) $150,000 Reduction for first payment, July 1 (5,376) Balance $144,624 Interest expense October 1: (8% × 3/12) × $144,624 = $2,892 Journal entries: July 1: Right-of-use asset (given) 150,000 Lease payable 150,000 Lease payable 5,376 Cash (lease payment) 5,376 October 1: Interest expense ([8% × 3/12] × [$150,000 − $5,376]) 2,892 Lease payable (difference) 2,484 Cash (lease payment) 5,376 The amount of interest revenue the lessor would record in conjunction with the second quarterly payment at October 1 also is $2,892, determined in the same manner.

Answer 430

$149,000 In this question, one needs to convert from cash receipts to accrual earnings. Compute the amount of earnings properly allocable to 20X2, and then compute the percentage. Revenue for January 1-May 31 = $400,000 - $50,000 = $350,000 Revenue for June 1-November 30 325,000 Revenue for December 1-31 70,000 Total 20X2 revenue $745,000 times 20% x 0.20 Equals Rill's 20X2 royalty revenue $149,000

Answer 431

$16,000 Minimum purchase commitment for 20X2 and 20X3 (100,000 units x $.10/u x 2 years) $20,000 Less scrap recovery (100,000 units x $.02 x 2 years) 4,000 Probable loss from purchase commitment $16,000 Note: The question asks for the probable loss from purchase commitment (i.e., the loss for the remaining two years on the contract). The loss on the 250,000 units already in inventory is not considered part of this loss; it would be reported as an operating loss due to the write-down of inventory due to obsolescence.

Answer 432

Regulation S-K Regulation S-K contains the instructions for filing the nonfinancial statement forms required by the SEC. Regulation S-X contains information regarding the financial statements that must be submitted to the SEC. There are no such documents as the “SEC Form Guide” or “Regulation 10-K-I (Instructions).”

Answer 433

I only The government-wide statement of activities should present direct operating expenses by function. Special and extraordinary items are reported separately at the bottom of the statement of activities. Extraordinary items, per GASB 2200.143, are transactions or other events that are both unusual in nature and infrequent in occurrence. Governments may allocate indirect expenses to benefiting functions, but they are not required to do so.

Answer 434

Collection of a note receivable from a related party Investing activities involve asset transactions other than those related to operating results (e.g., accounts receivables from sales and taxes).

Answer 435

understated by the difference between the note’s face amount and the note’s October 1 present value. The cost of the merchandise purchased (and sold by the end of the year) should have been based on the present value of the note used to pay for them, not the face amount. Since the note paid a higher rate of interest than what was required as a yield, the note would have a premium, a higher value than face. Thus, the note's present value was higher than its face amount. The higher value should have been added to purchase cost and moved to cost of goods sold. The lower value that was used for the purchase cost understated the cost of goods sold.

Answer 436

As a correction of an error (net of tax), by adjusting the beginning balance of retained earnings A change from an accounting principle that is not generally accepted to one that is generally accepted is a correction of an error. The cash basis is not generally accepted. Consequently, the change to accrual basis is a correction of an error. A correction of an error in prior years' financial statements is reported in the year of correction by restating all prior years affected by the error. The cumulative effect of the error on periods prior to those presented must be reflected in the carrying amounts of the assets and liabilities as of the beginning of the earliest year presented.

Answer 437

neither interperiod nor intraperiod income tax allocation. FASB ASC 740-10-10-1 notes: “Certain revenues are exempt from taxation and certain expenses are not deductible.” The items referred to in this passage are commonly called permanent differences. A permanent difference affects only the current reconciliation of book income to taxable income, and the permanent difference has no effect on the computation of deferred taxes. Permanent differences do not affect either interperiod or intraperiod income tax allocation.

Answer 438

The shipping company will not derecognize the asset in the current year. The first step is to determine if this transaction qualifies as a sale. Per FASB ASC 842-40-25-2, a sale has not occurred if the leaseback could be classified as a finance lease or a sales-type lease. Since title will transfer back to the shipping company, this does not qualify for sale/leaseback treatment. The shipping company will not derecognize the asset and will recognize the consideration received as a financial liability.

Answer 439

a capital projects fund. Depreciation expense is not recorded in any governmental fund since governmental funds account for neither depreciable assets nor expenses (the measurement focus of governmental funds is on expenditures, not expenses). Capital assets and related depreciation expenses are accounted for in proprietary funds and fiduciary funds. The only governmental fund type listed in the responses to this question is the capital projects fund, so this is the appropriate response.

Answer 440

rent expense equal to the 20X1 lease payments. In addition to transfer of title and purchase option, FASB ASC 842-10-25-2 provides three additional criteria for determining whether a lease is a finance lease: The lease term is for a major part of the economic life of the leased asset. The present value of the sum of the lease payments and any lessee guaranteed residual value not already in the lease payments equals or exceeds substantially all of the fair value of the underlying asset. The underlying asset is specialized and is not expected to have an alternative use to the lessor at the end of the lease term. FASB ASC 842-10-55-2 uses the former 75% and 90% rules as benchmarks. In Mollat's case the lease term is only 70% of economic life and the present value is only 80% of the equipment's fair value. The lease is, therefore, an operating lease and the lease payments should be reported as rent expense.

Answer 441

Prior-year 12/31 retained earnings, no; Prior-year 12/31 interest payable, yes The cost of the merchandise purchased (and sold by the end of the year) should have been based on the present value of the note used to pay for them, not the face amount. Since the note paid a higher rate of interest than what was required as a yield, the note would have a premium, a higher value than face. Thus, the note's present value was higher than its face amount, and the higher value should have been added to purchase cost and moved to cost of goods sold. The lower value that was used for purchase cost understated the cost of goods sold. If cost of goods sold was understated, then net income was wrong and retained earnings was not correct. Interest payable, however, is based on the face amount of the note and the stated payment rate, so it is correct.

Answer 442

decreases net assets without donor restrictions. Management and general expenses are reported in a separate functional classification from program expenses. They are shown as expenses and not as an offset to revenues. All expenses in the statement of activities are classified as changes in net assets without donor restrictions.

Answer 443

$18,000. Deferred tax benefits only come about from temporary differences, like depreciation and warranty costs. All deferred tax assets and liabilities are classified as noncurrent, and apply to both financial accounting and to tax accounting, but are taken at different times for each. The other items are only taken into account in financial accounting, and are not income or expense items for taxes. When depreciation for tax purposes is in excess of depreciation for financial accounting, then it will not give rise to a benefit, but instead to a liability. This leaves only the warranty costs, which do give rise to a deferred tax benefit, since the warranty costs will defer to future years' additional tax deductions. The way to measure the deferred tax benefit is by multiplying the estimated warranty costs by the future tax rate of 30%: $60,000 × 0.30 = $18,000

Answer 444

Cash inflow equal to the cash received and a cash outflow equal to the cash paid included in cash inflows from investing activities per FASB ASC 230-10-45-12 are “receipts from sales of property, plant, and equipment and other productive assets.” This pronouncement also includes, under the category of cash outflows from investing activities, “payments at the time of purchase or soon before or after purchase to acquire property, plant, and equipment and other productive assets.” (FASB ASC 230-10-45-13) Canary Co. should treat the cash payments related to the equipment separately as both a cash inflow and cash outflow in the statement of cash flows.

Answer 445

As a change in accounting estimate, not requiring restatement of prior periods According to GASB 1400.107, footnote 9, a change from depreciation to the modified approach should be reported as a change in an accounting estimate, and this change would not require a restatement of prior periods.

Answer 446

28.5% The first step is to know the taxable income. Net income for accounting purposes before tax would be the starting point. Adjust this number up or down for nontaxable or nondeductible items. The municipal interest income would be nontaxable, so this would be subtracted from accounting income and the insurance premiums would be nondeductible (since they relate to nontaxed income) and would need to be added. Thus, net income before taxes of $200,000 minus the municipal bond interest of $20,000, plus the insurance premiums $10,000 equals taxable income of $190,000: $200,000 - $20,000 + $10,000 = $190,000 Taxable income times the tax rate equals tax due of $57,000: $190,000 × 0.30 = $57,000 The effective tax rate would be the total tax due divided by the total income earned: $57,000 ÷ $200,000 = 0.285 (28.5%)

Answer 447

$1,000 decrease Interest awarded to the partners based on average capital account balances is added to their capital accounts, and deducted from partnership profits. The remaining amounts are divided equally among the partnership capital accounts (as agreed). Alloc. to Alloc. to Total Young Zinc Allocated Profit before interest $ 4,000 Interest allocation To Young (10% x $160,000) $16,000 (16,000) To Zinc (10% x $100,000) $10,000 (10,000) Residual allocation (1) (22,000) To Young (50% x $22,000) (11,000) 11,000 To Zinc (50% x $22,000) (11,000) 11,000 Increase in Young capital $ 5,000 Decrease in Zinc capital (1,000) 1 Residual is $4,000 - $16,000 - $10,000 = $(22,000)

Answer 448

$76,000 Interest expense = Cash interest + Decrease in prepaid interest - Decrease in interest payable Interest expense = $70,000 + 23,000 - $17,000 = $76,000 Another simple way to analyze a question like this is to prepare a journal entry reflecting the appropriate account changes. In this case: ``` Interest Expense Unknown Interest Payable (decrease) 17,000 Prepaid Interest (decrease) 23,000 Cash (interest paid) 70,000 Interest expense must be debited for $76,000 to balance the entry. ```

Answer 449

$362,400 The liability relates to the clocks expected to be shipped after the end of 20X9. The total clocks estimated to be ordered is 490,000 (1,400,000 boxes of cereal sold × 70% redemption rate = 980,000 UPC symbols expected to be redeemed; 980,000 UPC symbols ÷ 2 UPC symbols per clock = 490,000 clocks). Cost per clock is $1.51 ($4.50 purchase price + $1.00 shipping and handling – $3.99 received from customer = $1.51). The total cost of all clocks equals $739,900 (490,000 × $1.51), which is also the total liability for the clocks. Since 250,000 of the clocks have already been sent to customers, the cost of those clocks is subtracted from the total liability to arrive at the year-end liability for the clocks of $362,400 ($739,000 – $377,500).

Answer 450

at the balance sheet date. GASB C60.107 indicates that a government's compensated absences liability normally “should be calculated based on the pay or salary rates in effect at the balance sheet date.” (There is an exception for cases in which a justifiable lower amount should be used; for example, if the amount is based on a contractual agreement.)

Answer 451

A patent The FASB requires that non-goodwill intangible assets with finite lives be amortized, whereas similar assets with indefinite lives are not amortized. Both classifications of non-goodwill intangibles are required to be reviewed for impairment. Intangible assets with finite lives are tested for recoverability whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Intangible assets that have indefinite lives are not amortized and therefore are not tested for recoverability. However, they are reviewed for impairment at least annually. Patents fall into the first group, and are tested for recoverability. Goodwill and the trademark have infinite lives and fall into the second group; they are reviewed at least annually for impairment. Research and development (R&D) costs are expensed, not capitalized.

Answer 452

$30,000 An entity must recognize the effects of a tax position when it is more likely than not (greater than 50% chance), based on the technical merits, that the position will be sustained upon examination. If the position meets the more-likely-than-not recognition threshold, a tax position should be measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement. Here, only the $30,000 and $10,000 outcomes have a cumulative probability over 50%—representing one of those outcomes is more likely than not to occur. Because $30,000 is the larger tax benefit, it is recognized fully. The $100,000 likely outcome has an individual and cumulative probability of only 20% and is not more likely than not to be recognized.

Answer 453

$17,000 Using the basic accounting equation, Beginning balance + Additions - Deletions = Ending balance: Bonds payable on 12/31/X1 (beginning inventory) $47,000 Plus bonds issued in 20X2 20,000 Subtotal 67,000 Less bonds payable on 12/31/X2 (ending inventory) 50,000 Bonds redeemed in 20X2 (presumably for cash) $17,000

Answer 454

$20,000 Only the equipment that has an alternative use is capitalized and depreciated. The depreciation is $100,000 ÷ 5 = $20,000. The other expenditures should be expensed immediately. FASB ASC 730-10-25-2 states: "Elements of costs shall be identified with research and development activities as follows (see [FASB ASC] 350-50 for guidance related to website development): "Materials, equipment, and facilities. The costs of materials (whether from the entity's normal inventory or acquired specially for research and development activities) and equipment or facilities that are acquired or constructed for research and development activities and that have alternative future uses (in research and development projects or otherwise) shall be capitalized as tangible assets when acquired or constructed. The cost of such materials consumed in research and development activities and the depreciation of such equipment or facilities used in those activities are research and development costs. However, the costs of materials, equipment, or facilities that are acquired or constructed for a particular research and development project and that have no alternative future uses (in other research and development projects or otherwise) and therefore no separate economic values are research and development costs at the time the costs are incurred."

Answer 455

$245,000 Be aware that ASU 2015-03 requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability, consistent with debt discounts; the recognition and measurement guidance for debt issuance costs were not affected by the amendments. Amortization of debt issuance costs also shall be reported as interest expense; issue costs will no longer be reported in the balance sheet as deferred charges. The items listed (promotion costs, engraving and printing, and underwriters' commissions) would all qualify as bond issuance costs: $20,000 + $25,000 + $200,000 = $245,000

Answer 456

Accumulated benefit obligation The glossary of FASB ASC 715-30 (Compensation—Retirement Benefits; Defined Benefits Plans—Pension) defines the projected benefit obligation as follows: “The actuarial present value as of a date of all benefits attributed by the pension benefit formula to employee service rendered prior to that date. The projected benefit obligation is measured using assumptions as to future compensation levels if the pension benefit formula is based on those future compensation levels (pay-related, final-pay, final-average-pay, or career-average-pay plans).” FASB ASC 715-30-20 states, “The accumulated benefit obligation differs from the projected benefit obligation in that it includes no assumption about future compensation levels.” Accumulated benefit obligation is based upon prior compensation. Project benefit obligation is based on future compensation.

Answer 457

Object In governmental accounting, expenditures should be recorded in a multiple classification scheme—typically by (1) fund, (2) function or program, (3) organizational unit (e.g., department), (4) activity, (5) character, and (6) object (“object of expenditure”). Object refers to “the type[s] of items purchased or services obtained” (GASB 1800.137) which expenditures are for—that is, “what” is acquired. Governments pay salaries and wages in order to acquire “personal services.”

Answer 458

Capitalize; depreciation is required. Proprietary funds (including enterprise funds and internal service funds) are reported using the economic resources measurement focus and the accrual basis of accounting. Essentially, this means they are reported using a revenue and expense model. In this model, equipment is recorded and reported as capital assets (the term used for fixed assets in government reporting). Because expenses are reported, depreciation expense must be calculated and reported.

Answer 459

78 Days' sales in inventory = (Average inventory ÷ Cost of goods sold) × Working days per year: (($336,000 + $288,000) ÷ 2) ÷ $1,200,000 = 0.26 0.26 × 300 days = 78 days

Answer 460

The total future cash payments This question relates to the debtor's gain on troubled debt restructuring. FASB ASC 310-40-40-1 has changed the treatment of creditor's losses on a restructuring to include the use of present values. Debtor's gains, however, continue to follow FASB ASC 470-60-35-6. Debtor's gains are calculated based on undiscounted amounts. The total future cash payments, including interest, are used to compute the gain on troubled debt restructuring.

Answer 461

The MD&A should compare current-year results to the prior year with emphasis on the current year. Management’s discussion and analysis (MD&A) is presented prior to the basic financial statements as an analytical overview. The MD&A focuses on the primary government and distinguishes information pertaining to the primary government from that of its discretely presented component units; it presents both a short-term and a long-term analysis of the local government’s activities and status; and it discusses the current-year results compared with the prior-year results, discussing both positive and negative aspects of the comparisons. The MD&A is not presented with other RSI (required supplementary information), it does not need to include an analysis of each fund, and it does not present condensed fund information.

Answer 462

$90,000. Here one needs to convert from the cash method to the accrual method as to the deferred amount of royalty expenses. The royalty payment was charged to (added to) royalty expense, but there was also a year-end credit adjustment downwards to royalty expense. The only reasonable debit to the year-end credit to royalty expense would be to debit (add to) prepaid royalties, as this could only be deferred (not properly accrued this year) royalty expenses. So far, prepaid royalties have had a debit balance of $65,000, and if one adds an additional debit to prepaid royalties of $25,000, there will be an ending balance of prepaid royalties of $90,000.

Answer 463

$(120,000) Cash inflows from financing activities: No listed items are inflows $ 0 Cash outflows from financing activities: Dividends paid (81,000) Purchase of treasury stock (39,000) Net cash provided by financing activities ($120,000) Dividends declared created a liability, but until they are paid, no cash flows out of the corporation and they will not appear on the cash flow statement until then. Purchase of equipment and the sale of bonds held for investment are investing activities, not financing activities. Loss on sale and amortization of premium are operating activities.

Answer 464

Other comprehensive income, not recognized Unrealized holding gains and losses on available-for-sale debt securities are reported in Other Comprehensive Income. Held-to-maturity debt securities are carried at amortized cost, and are not adjusted to fair value, so there would not be any unrealized holding gains or losses to recognize.

Answer 465

$0 The GASB evaluated these debt issuance costs and concluded that, with the exception of prepaid insurance, the costs relate to services provided in the current period and thus they should be expensed in the current period

Answer 466

$52,000 FASB ASC 323-10-05-5 requires the use of the equity method when a company acquires 20% or more of the outstanding stock of another company. Significant influence is assumed. Under the equity method, Puff should report 40% of the $150,000 income of Straw, or $60,000. Because Straw's equipment has a fair market value exceeding its carrying value, Puff should amortize the difference over the equipment's 5-year life. Puff should record 40% of $100,000 ($40,000) as equipment subject to amortization (depreciation). Straight-line amortization of $40,000 over five years yields an expense of $8,000. Puff has income of $60,000 less $8,000, or $52,000 for 20X1.

Answer 467

No effect Receivables usually are reported at the same time that revenue is recognized. For reporting purposes, revenues should be reduced by an appropriate allowance for amounts estimated to be uncollectible when revenue is recognized, thus affecting equity at time of recognition. To the extent of the allowance made ($50,000), the actual write-off of the receivable against the allowance would have no effect on net position as the allowance (contra asset) would be reduced and the receivable would be reduced for a net effect of $0.

Answer 468

$900,000 Under the acquisition method, a number of adjusting and eliminating entries are made during the consolidation process. Eliminations may be categorized as those related to the following: The investment account Current-year changes in the investment account Year-end reciprocal balance sheet accounts Reciprocal income statement accounts Intercompany profits and losses Since Daisy sold all of the inventory purchased from Tulip, Daisy would have recognized $100,000 in cost of goods sold (COGS). As Daisy is a 100%-owned subsidiary, 100% of the COGS from Tulip is eliminated (i.e., intercompany profits and losses). Total COGS on the consolidated statement of income is $900,000 ($600,000 + $400,000 − $100,000).

Answer 469

Yes, because the carrying value is not recoverable The answer choice, “No, since the undiscounted cash flows are larger than the carrying value,” is wrong, but would be the rule under U.S. GAAP today, IFRS does not use undiscounted future cash flows. The answer choice, “No, because the dock can be sold for its carrying value,” is wrong because IFRS uses net realizable value, not gross sale proceeds, for impairment tests. An asset is tested under IFRS for impairment, when there is reason to suspect loss in value. The test is to determine if the carrying value is recoverable. The recoverable amount is the greater of value in use (present value of discounted future cash flows) or net realizable value (sales proceeds less cost to sell). Here, that is $401,000 less the broker commission of $6,000, or $395,000. Since this is greater than the value in use ($380,000), the recoverable amount is $395,000, which is $5,000 below the carrying value, and thus A. A. recognizes an impairment loss of $5,000.

Answer 470

Accounts written off: deduction; Increase in accounts receivable balance: deduction This question is asking to convert from sales during the period to cash collections. Since the company uses the direct write-off method, there is no need to consider any allowance account balance. Thus, the sales for the period only have to be adjusted downwards for any accounts written off, and also downwards for any increases in deferred receipts (in the form of additions to accounts receivables).

Answer 471

$9,000,000 In Maple City's General Fund budgetary entry, the amount that is debited to the account “Estimated Revenues” would consist only of those financial resource inflows expected to be recorded as revenues. The property taxes, licenses, and fines would be recorded as revenues. Proceeds of the debt issue would be recorded either as a liability, if short-term debt, or as proceeds of bonds (an other financing source) if long-term debt, not as revenues. Also, the interfund transfers would not be recorded as revenues. Therefore, the correct answer is $9,000,000 of property taxes, licenses, and fines.

Answer 472

Only incremental costs will qualify as initial direct costs. Only incremental costs qualify as initial direct costs subject to capitalization in both lessor and lessee accounting. The same definition is used by both lessors and lessees: these costs are (1) those that the entity would not have incurred if the lease had not been entered into and (2) are the same for both the lessor and lessee. Although the definition of what qualifies as an initial direct cost is the same for the lessee and lessor, the lessee and lessor may have different costs associated with the lease. Initial direct costs are capitalized and amortized over the life of the lease.

Answer 473

Serial bonds, $475,000; Debenture bonds, $400,000 Serial bonds mature in installments (only part of the total principal is paid back each year, so only some of the total bonds are paid off each year) and thus are described as maturing annually. Thus, the serial bonds are the 9.375% bonds and the 10% bonds for a total of $475,000 ($275,000 + $200,000). Debenture bonds are unsecured debt, and so these are the 9.375% and the 11.5% bonds for a total of $400,000 ($275,000 + $125,000).

Answer 474

issuance of a new FASB Statement (SFAS) that requires the use of the new method and specifies that the change be recognized by including cumulative effect (net of income taxes) in net income. FASB ASC 250-10-45-5 mandates that voluntary changes in accounting principle be recognized using the retrospective approach, in which the cumulative effect is reported as an adjustment of the beginning-of-year retained earnings of the earliest year presented. The only exception is when the FASB issues a new pronouncement and mandates in that pronouncement that a change in accounting principle made to comply with that pronouncement should be made by including the cumulative effect in net income of the year of change.

Answer 475

$3,300,000. At the end of Year 1, the company was 20% finished with a project costing $7,500,000 total, so they must have already expended $1,500,000 (0.20 × 7,500,000). By the end of Year 2, the company was 60% done with a total estimate of $8,000,000 cost, so by the end of the year, the total costs expended so far must have been $4,800,000 (0.60 × $8,000,000). During Year 2, the additional costs to go from $1,500,000 total cost to $4,800,000 total cost must have been expended, for a total year 2 cost of $3,300,000 ($4,800,000 – $1,500,000).

Answer 476

$545,000 Regardless of whether the direct or indirect method is used to determine cash flows from operating activities, the following items are required to be disclosed: Amount of income taxes paid during the period ($325,000) Amount of interest paid during the period ($220,000) $325,000 + $220,000 = $545,000

Answer 477

other. The letter of transmittal and the statistical section required for a CAFR and GFOA's certificate are neither basic statements nor required supplemental information.

Answer 478

IFRS. Under both IFRS (International Financial Reporting Standards) and U.S. GAAP, lessees initially measure variable lease payments based on an index (e.g., Consumer Price Index) or a rate (e.g., LIBOR (London Interbank Offered Rate)). However, IFRS requires an entity to remeasure variable lease payments every time an adjustment to the lease payments takes effect that could result in a change in the contractually required cash flows, while U.S. GAAP only requires a lessee to remeasure the payments when an entity is required to reassess the lease obligation for other purposes (i.e., adjustment to an index or rate does not constitute a reassessment event).

Answer 479

Decrease in total stockholders' equity and increase in book value per share The entry to record the treasury stock is: Dr. Cr. Treasury stock XXX Cash XXX Treasury stock is a deduction from total stockholders' equity; therefore total stockholders' equity decreases. Since the price paid for the reacquired shares is less than their book value, the book value per share of the remaining outstanding shares must increase. Before the reacquisition of the shares, the book value per share is the same for all shares (i.e., those that will be reacquired and those that will not be). The reduction in total book value of the entity is equal to the total cost of the shares reacquired, which is less than the total book value of those shares. Thus, the percentage reduction in total book value was less than the percentage reduction in the number of outstanding shares. Therefore, the book value per share of the remaining shares must increase. For example, assume that an entity has total stockholders' equity of $1,000,000 and 10,000 shares outstanding. The book value is $1,000,000 ÷ 10,000 shares = $100. If 1,000 shares are reacquired at $60 per share (an amount less than the $100 book value per share), the entry would be: Dr. Cr. Treasury stock (1,000 x $60) 60,000 Cash 60,000 After the reacquisition of the shares, total stockholders' equity is $1,000,000 - $60,000, or $940,000. The book value per share of the remaining outstanding shares is $940,000 ÷ 9,000 outstanding shares, or $104.44. Therefore, the reacquisition of outstanding shares at a price less than their book value per share causes the book value per share of the remaining outstanding shares to increase.

Answer 480

$84,000 Under the cash basis of accounting, revenue is recognized when cash is received and expenses are recognized when cash is disbursed; income and expense items are not accrued. Cash basis accounting results in a measure similar to net income called net operating cash flow, which is the difference between cash receipts and cash disbursements. Savor should report cash-basis pretax income of $84,000 ($100,000 accrual income less the $10,000 accounts receivable accrual increase, less the $6,000 cash paid for payables). Note that the cash method is not an allowable method under GAAP unless there is no material difference from the accrual method.

Answer 481

Gourmet will report a loss on the write-down of $242000 on the assets being distributed in the property dividend. FASB ASC 845-10-30-1 requires that "a transfer of a nonmonetary asset to a stockholder or to another entity in a nonreciprocal transfer should be recorded at the fair value of the asset transferred, and a gain or loss should be recognized on the disposition of the asset." Since the market value of the merchandise was less than its carrying amount, Gourmet should report the resulting loss as a reduction in income ($494000 − $252000 = $242000).

Answer 482

A statement of cash flows should be presented for proprietary funds only. Governments should present a statement of cash flows for proprietary funds using the direct method of presenting cash flows from operating activities.

Answer 483

7% convertible bonds, issued at par, with each $1,000 bond convertible into 40 shares of common stock Dilutive securities reduce earnings per share. To determine dilution, a conversion basis must be stated. Each 7% bond yields $70 ($1,000 × 7%) of interest; the net-of-tax interest is $49 ($70 × (1 − .30)). The conversion increases the number of shares by 40. The earning per share on the converted bonds is only $1.225 (49/40) thus diluting the basic earnings per share of $1.29.

Answer 484

increased by the face amount of the note. A note sold with recourse is a promise to pay the financial institution if the maker dishonors the note. When receivables are sold with recourse, the entity has a contingent liability. A contingent liability is an obligation that has to be paid in the future. Therefore, the notes receivable discounted account must be increased by the face amount of the note.

Answer 485

$3,780 The amount to be added back is the after-tax amount of the interest expense on the bonds. The annual interest expense on the bonds is equal to the cash payment less the premium amortization, since the bonds were issued at a premium. The annual cash payment is $8,000 ($100,000 × .08). The net annual interest expense is $8,000 – $1,700 = $6,300. The net annual interest expense is multiplied by the tax rate and then that amount is subtracted from the annual interest expense to arrive at after-tax interest expense ($6,300 × .40 = $2,520; $6,300 – $2,520 = $3,780). The amount can be more efficiently computed in the following manner: $6,300 × (1 – .40) = $3,780.

Answer 486

$81 Fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability. If there is no principal market, the entity should use the most advantageous market for that asset or liability. The FASB defines the most advantageous market as “the market that maximizes the amount that would be received to sell the asset or minimizes the amount that would be paid to transfer the liability, after taking into account transaction costs and transportation costs” (FASB ASC 820-10-20). The price used to measure fair value should not be adjusted for transaction costs, which are the incremental direct costs to sell the asset or transfer the liability. In other words, in determining the most advantageous market, adjust for transaction costs. But to compute the actual fair value amount, ignore the transaction costs. The first market yields $76 and the second market yields $80, so the second market is the most advantageous. The fair value in the second market is $81 ($80 with the $1 added back).

Answer 487

$0 This arrangement is not substantially different from a consignment. Devlin does not meet the requirements for a sale until Jensen has sold the goods.

Answer 488

Performance obligations identified in a contract with a customer are limited to the goods or services explicitly stated in that contract. Performance obligations are not limited to the goods or services explicitly stated in a contract. A performance obligation as a promise in a contract with a customer to transfer to the customer either a good or service that is distinct or a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer. That promise can be explicit, implicit, or based upon customary business practices. Implicit promises can create a valid expectation by the customer that the entity will transfer goods or services to the customer (e.g., free maintenance services). A portion of the transaction price must be allocated to any implied promise identified as a performance obligation.

Answer 489

the amount of joint costs for each kind of joint activity. Not-for-profit entities (NFPs) that allocate joint costs are encouraged, but not required, to disclose the amount of joint costs for each kind of joint activity, if practical. They must disclose the following in the notes to the financial statements: the types of activities for which joint costs have been incurred; a statement that such costs have been allocated; and the total amount allocated during the period and the portion allocated to each functional expense category.

Answer 490

of the environment in which the subsidiary primarily generates and expends cash. FASB ASC 830-10-45-2 states that the functional currency is the currency of the primary economic environment in which the entity operates or the currency in which most of the subsidiary's transactions are denominated.

Answer 491

All of the answer choices are conditions under which joint activities are not required to be reported as fundraising activities. There are three conditions that must be met to allow a nongovernmental not-for-profit to report costs of joint activities in a category other than fundraising activities. Those three conditions are: one or more of the purposes of the activity is to accomplish some program function or management and general responsibility of the entity; the audience for the activity was chosen based on some other criteria other than the ability to make contributions; and the content of the activity motivates the audience to take specific actions other that making contributions, and these actions support the program goals or fulfill a management and general responsibility of the entity. Therefore, all of the answer choices are conditions under which joint activities are not required to be reported as fundraising activities.

Answer 492

$160,000 Stock appreciation rights (SARs) provide a cash bonus to the employee based upon the change in the market value of the stock. In Wolf's case, each SAR entitles the employee to receive cash equal to the difference between $20 and the market price of the stock on the date each right is exercised. Under FASB ASC 505-50-15-2, the measurement objective for liabilities incurred under share-based compensation arrangements is the same as that for equity instruments awarded to employees; that is, to estimate the fair value of the award at the measurement date. The measurement date for equity awards is the grant date. The measurement date for a liability award, such as Wolf's, is the date of settlement. Liabilities incurred under share-based payment arrangements, such as Wolf's SARs, are remeasured at the end of each reporting period until settlement. Wolf's liability at December 31, 20X2, would be measured as follows: Fair value of SARs at 12/31/X2 (30,000 x $8 fair value) $240,000 Percentage to service period through 12/31/X2 2/3 Liability at 12/31/X2 $160,000

Answer 493

$12,000 Only the water enterprise fund is a business-type activity which provides services to the general public for a fee; the pension fund and the internal service fund are not business-type activities. The city should report $12,000 as the change in net position.

Answer 494

$(10,000) In the case of a transfer of assets to satisfy a debt in a troubled debt restructuring, the debtor shall recognize a gain/loss: Fair value of real estate transferred $ 90,000 Carrying amount of real estate 100,000 Ordinary loss on transfer of real estate ($ 10,000) ========== The liability is retired by the transfer of real estate to Mene. An ordinary operating gain or loss is recognized on the transfer of real estate. The ordinary loss is the excess of the real estate's carrying amount over its fair market value ($100,000 − $90,000 = $10,000). The journal entry to record the full liquidation of Knob's liability to Mene is: Dr. Cr. Note payable 150,000 Loss - transfer of real estate 10,000 Real estate: 100,000 Gain - restructure of debt 60,000

Answer 495

$1,250,000 The year-end net assets can be found by deducting payouts and expenses and adding contributions, income, and other additions to the beginning net asset balance as follows: Beginning net assets $ 650,000 Add: Contributions 1,350,000 Add: Investment income 300,000 Less: Benefits paid (900,000) Less: Administrative expenses (150,000) Ending net assets $1,250,000

Answer 496

$201,900. Items to be included in the revenue section of the 20X2 income statement: Net sales revenue $187,000 Interest revenue 10,200 Gain on sale of equipment 4,700 Total revenues $201,900 ======== Note: Generally accepted accounting principles require that the other items listed appear in other sections of the income statement or in another financial statement.

Answer 497

$25,000 Remeasurement gains and losses are reported directly on the income statement as foreign currency gains and losses, while translation gains and losses are recognized as a translation adjustment on the face of the balance sheet. Mentor would recognize the $25,000 remeasurement gain on the income statement. The $40,000 translation gain would appear on the balance sheet and would not impact Mentor’s net income.

Answer 498

$8,000 The payable has been accruing since July at the rate of $2,000 per month ($24,000 ÷ 12) and is at $8,000 when paid. Dr. Cr. Semi-annual realty tax payment = $12,000 Monthly tax accrual = $12,000 / 6 months = $2,000 September 1, 20X1, entry to purchase warehouse: Warehouse xxx Cash xx Real estate taxes payable 4,000 (2 months x $2,000) September 30, 20X1, entry to accrue taxes: Real estate taxes expense 2,000 Real estate taxes payable 2,000 October 31, 20X1, entry to accrue taxes: Same as September 30 November 1, 20X1, entry to pay taxes: Prepaid real estate taxes 4,000 Real estate taxes payable 8,000 Cash 12,000 The November and December accruals should credit prepaid real estate taxes.

Answer 499

$29,800 The difference between gross and net reporting is that at gross reporting, the discounts are not recognized in the carrying values of the accounts until payment is made. Thus, the accounts in question will be carried at their full gross amounts due (not less the discount available). The account that will be affected by the change is the accounts payable account that keeps track of the payments still due, at their full gross amount due of $30,000. The purchases already paid for have been adjusted for any available discount and do not require adjustment now. Any expired discounts are also no longer available and any purchases they relate to should stay at gross amounts due. The unexpired discounts that are still available to take, the $200, should be adjusted into the carrying value of accounts payable now still outstanding, and that is the only adjustment to make. Thus, what needs to be done is to restate accounts payable down by the $200 unexpired discounts, from $30,000 to $29,800.

Answer 500

$527,500 When applying dollar-value LIFO (last in, first out), one must first compute the ending inventory total using base-year prices, to tell how much the total inventory (at base-year prices) has increased or decreased. If this is an increase, then add the increase amount (multiplied by the year’s price level) to the beginning inventory total. $ 525,000 December 31, 20X1, inventory at base-year cost - $500,000 January 1, 20X1, inventory at base-year cost $25,000 20X1 layer at base-year cost x 1.10 20X1 index $27,500 20X1 layer at December 31, 20X1, cost Dollar-value LIFO inventory on December 31, 20X1 Base-year layer $500,000 20X1 layer at 20X1 cost 27,500 Total $527,500

Answer 501

At fair value FASB ASC 962-205-45-2 requires that an employee benefit plan report its net assets at fair value.

Answer 502

Cumulative effect of a change in accounting estimate The components of other comprehensive income are to be presented based on their nature. Under current authoritative accounting literature, three categories of elements of other comprehensive income exist: 1. Unrealized gains and losses on available-for-sale debt investments 2. Foreign currency items 3. Changes in unrecognized prior service costs, unrecognized gains and losses, and unrecognized transition assets or obligations related to defined benefit pension plans and defined benefit other postretirement plans

Answer 503

$9,000 Rune Co. would begin the bank reconciliation by starting with its recorded $10,000 checkbook balance. The $1,000 check payable to Rune that lacked sufficient funds (NSF) and was included in the checkbook balance needs to be removed from the balance because, as of December 31, that $1,000 was not available to Rune. The $4,000 check dated on January 3 is not available as cash to Rune until January 3 and therefore should be excluded from its cash balance, resulting in a final balance of $9,000 ($10,000 Beginning balance − $1,000 NSF check).

Answer 504

$45,000 The $45,000 amount is calculated as follows: Insurance expense – Year 2 $20,000 Increase in prepaid insurance ($50,000 – $25,000) 25,000 Total $45,000

Answer 505

$16,350. The current provision for income taxes is simply the taxable income for the year multiplied by the tax rate for the year. Thus, we need to find the taxable income for the year. Start with the pretax income of $100,000, and add $8,000 to it because tax depreciation expense was less than book depreciation. The $35,000 equity method income for financial accounting needs to be subtracted since it is not the taxed amount: $100,000 + $8,000 – $35,000 = $73,000 The dividends that are taxable are subject to a dividends-received deduction of 65%. Thus, only add in $8,750 of the dividends ($25,000 × 0.35 (1 − .65)), because the dividends, though taxable in part, are not financial accounting income when applying the equity method: $73,000 + $8,750 = $81,750 Thus, taxable income is $81,750 ($100,000 + $8,000 – $35,000 + $8,750) and the current income tax due is $16,350: $81,750 × 0.20 = $16,350

Answer 506

$1,240,000 In accounting for business combinations, the stockholders' equity of the acquired entity is eliminated against the investment account. As a result, consolidated retained earnings include only the retained earnings of the parent company. Thus, the Owen Corp. consolidated balance sheet on December 31, 20X1, would show a retained earnings amount of $1,240,000, an amount equal to Owen's separate retained earnings.

Answer 507

include the effect of the change on the January 1, 20X1, deferred tax liability in income from continuing operations of 20X1. The effect of the change on the deferred tax asset or liability at the beginning of the year of change should be included in income from continuing operations for the period that includes the enactment date.

Answer 508

net assets reflecting all investments at cost. The statement of net assets available for benefits of the plan must include the following: Total assets Total liabilities Net assets reflecting all investments at fair value Net assets available for benefits

Answer 509

$15,000 FASB ASC 710-10-25-7 provides that “an employer is not required to accrue a liability for nonvesting accumulating rights to receive sick pay benefits…” Thus, North Corp.'s liability for compensated absences at December 31, 20X1, is $15,000 for the 150 vacation days (at $100 per day).

Answer 510

The adjusted market assessment approach Examples of suitable estimation methods (which should be applied consistently for similar circumstances) include the adjusted market assessment approach, which uses competitors’ prices for similar goods or services and adjusts those prices to reflect the entity’s costs and margins; the expected cost plus a margin approach, which forecasts expected costs of satisfying a performance obligation and adds an appropriate margin for those goods or services; and the residual approach, which estimates a standalone selling price by reference to the total transaction price less the sum of the observable standalone selling prices of other goods or services promised in the contract.

Answer 511

The statement permits election of fair value measurement on a contract-by-contract basis. Incorrect FASB ASC 825-10-25-1 permits the fair value election but does not require it. Unrealized gains and losses on these items are reported in earnings, not directly to retained earnings: "This Subtopic permits all entities to choose, at specified election dates, to measure eligible items at fair value (the 'fair value option')." FASB ASC 825-10-25-2 requires that the fair value option be applied contract by contract: "The decision about whether to elect the fair value option: a. "Shall be applied instrument by instrument, except as discussed in [FASB ASC] 825-10-25-7 b. "Shall be irrevocable (unless a new election date occurs, as discussed in [FASB ASC] 825-10-25-4) c. "Shall be applied only to an entire instrument and not to only specified risks, specific cash flows, or portions of that instrument."

Answer 512

Discrete presentation, no; Blended, yes Blending of financial results is allowed as the public school system and the city are not separate legal entities. The city is responsible for the finances of the school system (the school board has no authority to levy taxes or issue bonds). Discrete presentation is for affiliated entities whose resources are entirely for the benefit of the primary government. The school system does not operate for the sole benefit of the town.

Answer 513

$5,000 FASB ASC 718-10-30-2 requires that the fair value method be used. Except in very rare circumstances, the intrinsic value method is no longer acceptable. Accordingly, total compensation cost for Farm Co. is the $10,000 fair value of the options on the grant date (1,000 shares × $10 fair value per option on January 2, 20X1). The $10,000 total compensation cost should be amortized over Farm's 2-year service period at the rate of $5,000 per year ($10,000 ÷ 2 years = $5,000). The compensation expense for 20X1 therefore is $5,000.

Answer 514

Operating activities: $100,000 addition to net income; Investing activities: $400,000 cash inflow The net loss ($400,000 – $500,000 = $(100,000)) would be removed (added back) from net income. The cash from the sale would be included as a cash inflow from investing activities.

Answer 515

$8,000,000 The obligations of the proprietary fund, the revenue bonds of $2,000,000, should be shown as a fund liability. The other bonds should be shown in the government-wide statements as a liability relating to governmental activities, but not shown in the fund statements. The general obligation debt consists of the $4,000,000 and $3,000,000 general obligation bonds as well as the special assessment bonds of $1,000,000. Special assessment debt is usually an obligation of the general government, although some costs may be defrayed with special assessments.

Answer 516

$21,800. If bonds are purchased at a discount, then the discount is immediately recorded as a credit in the acquiring corporation’s books. As the discount is amortized, it is thus debited, to decrease it. When cash is received as interest, the additional debit to amortize the discount adds to the debit to cash to increase the total credit to recognized revenue. Therefore, the total revenue for the year will be the cash received as interest over the semiannual period, $500,000 (face amount) × 0.08 (8%) × 6/12, or $20,000, plus the $1,800 discount amortized, for a total revenue for the year of $21,800.

Answer 517

$95,000 Of the $300,000 of contributions, $200,000 designated for use during the current year would have been collected in full by the date of the financial statements issued as of the end of the year. This $200,000 would be reported in the statement of activities as unrestricted support. Of the remaining $100,000, 5% or $5,000 is estimated to be uncollectible. Therefore, the $95,000 anticipated to be collected in the subsequent year is reported in the statement of activities as restricted support.

Answer 518

$2,200,000

Answer 519

Net income: No effect; Total assets: No effect When the allowance method of accounting for bad debts is applied, the accounts that will be eventually written off are in both the accounts receivable and the allowance account balances. When the account is written off, it is taken out of both at the same time, and the bad debt expense had already been taken as an estimated expense when the sale was made. The write-off lowers accounts receivable with a credit, and the allowance account with a debit of the same amount. The write-off entry does not affect expenses, and leaves the net realizable amount of accounts receivable the same.

Answer 520

$20,000 If the sum of the standalone selling prices of the promised goods or services in the contract exceeds the transaction price (that is, the customer receives a discount for purchasing a bundle of goods or services), an entity should allocate the discount to all of the performance obligations on a relative standalone selling price basis. The warranty costs $200, but Aqua offers it for $150 when purchased with a tank. Aqua expects an 80% chance. Aqua sells 500 tanks along with the extended warranty discount offer. The $50 discount has an 80% chance of being taken by a customer, so the standalone selling price associated with 500 tanks is $20,000 (computed as $50 × 80% × 500).

Answer 521

Report the fee as a deduction in the statement of changes in net position of the fund. GASB Statement 84 requires fiduciary funds to report administrative costs as a deduction in the statement of changes in net position. The fund used to collect and remit property taxes for other governments is a fiduciary fund, specifically a custodial fund. Each government that is charged the fee will include it as an expenditure on its own books in the appropriate governmental fund.

Answer 522

statutory consolidation. FASB ASC 805-10-20 defines a business combination as follows: "A transaction or other event in which an acquirer obtains control of one or more businesses. Transactions sometimes referred to as true mergers or mergers of equals also are business combinations." The acquisition of stock classification refers to the acquisition of capital stock by the acquiring entity, which becomes the parent company. No third entity is established. The acquisition of assets classification refers to the transfer of assets from the acquired entity to the acquiring entity. No third entity is established. The statutory merger classification refers to the merging of the two entities into one. No third entity is established. The statutory consolidation classification refers to the merging of two enterprises into a newly established enterprise.

Answer 523

Neither general funds nor fiduciary funds The measurement focus of the general fund and other governmental-type funds is flow of current financial resources. This focus provides a measure of the change in current financial resources. The measurement focus of trust funds, including fiduciary funds, is economic resources. The purpose of measurement is change in trust net position reported as additions and deductions. Net income is not determined for governmental or fiduciary fund types.

Answer 524

I only The intent of balanced budget laws is to achieve interperiod equity, such that current taxpayers neither pay disproportionately for future years' services nor receive current-year services that must be paid for by future taxpayers. In contrast, transfers among funds should always be equal; however, equality of transfers in and out has no bearing on the extent to which interperiod equity is achieved in governmental external financial reporting. (GASB Concepts Statement 1)

Answer 525

Similar to U.S. GAAP, the cash flow statement can be prepared using either the indirect or direct method under IFRS. Both U.S. GAAP and IFRS allow entities to choose between the direct and indirect method of preparing the statement of cash flows.

Answer 526

Expense $1,100,000 as incurred. All research and development costs are expensed when incurred. A useful way to determine if costs are research and development costs is to establish if they relate to activities identified with the period prior to the beginning of commercial production. Research and development costs are identified in five categories: (1) materials, equipment, and facilities; (2) personnel; (3) intangibles; (4) contract services; and (5) indirect costs. A prototype is a preliminary or first model, often built for demonstration purposes (not production) from which other forms are copied or developed. Both the $1,000,000 and the $100,000 qualify as R&R cost and should therefore be expensed as incurred. The remaining answer choices are all incorrect as the items cannot be capitalized.

Answer 527

$105,000 A correction of an error in prior years' financial statements is reported in the year of correction by restating all prior years affected by the error. The cumulative effect of the error on periods prior to those presented must be reflected in the carrying amounts of the assets and liabilities as of the beginning of the earliest year presented in the current period's financial report. In addition, the offsetting amount of this cumulative effect must be reported as an adjustment to the opening balance of retained earnings of the earliest year presented in the current period's financial report. (FASB ASC 250-10-45-23 to 45-24) Depreciation of $20,000 should have been recognized in Years 1–4, as well as each of the remaining six years of the asset's life after Year 4. However, no depreciation was recorded in any of the years up to Year 4. Rather, an expense of $210,000 was recognized in Year 1. Correct Expensed Cumulative Cumulative Depreciation Depreciation (Before Tax) (After Tax) Year 1 $20,000 210,000 $190,000 $133,000 Year 2 20,000 0 170,000 119,000 Year 3 20,000 0 150,000 105,000

Answer 528

Zero The only cash involved in this transaction is the cash paid. It would be included in cash flows from investing activities.

Answer 529

Common stock that contains an unconditional redemption feature An unconditional redemption feature on stock must be reported as a liability. Cumulative or convertible preferred stock does not create a liability. Neither does common stock issued at a discount.

Answer 530

$0 FASB ASC 250-10-45-5 mandates that voluntary changes in accounting principle be recognized using the retrospective approach, in which the cumulative effect is reported as an adjustment of the beginning-of-year retained earnings of the earliest year presented. The only exception is when the FASB issues a new pronouncement and mandates in that pronouncement that a change in accounting principle made to comply with that pronouncement should be made by including the cumulative effect in net income of the year of change.

Answer 531

75% Additional guidance for identifying reportable segments and presenting information about reportable segments is provided in FASB ASC 280-10-50-14. Additional operating segments shall be identified unless: the total of external revenues of all reportable segments must make up at least 75% of the total consolidated revenues or an operating segment that previously met the criteria as a reportable segment, but does not meet those criteria in the current period, may still be treated as a reportable segment if management judges it to be of continuing significance.

Answer 532

Prepaid insurance: $3,400; Insurance expense: $1,100 At the end of the period, the expired insurance should be moved into expense, leaving only the unexpired portions in prepaid insurance. Prepaid insurance on November 1, 20X1 $3,600 Less November and December expense 2($3,600/36 months) 200 Prepaid insurance on December 31, 20X1 $3,400 ====== Insurance expense Total payments Prepaid insurance on December 31, 20X1 = for insurance - balance = ($90 + $4,410) - $3,400 = $4,500 - $3,400 = $1,100 Note: Because the trial balance does not show a prepaid amount for the $3,600, and the $90 amount is too small to relate reasonably to the renewal policy, it can be assumed that the books need to be adjusted to transfer the correct prepaid amount ($3,400) from expense and expense the $90, which likely represents the expired remainder of the old policy.

Answer 533

$56,111 Tell Co. must treat the lease as a finance lease because the present value of the lease payments exceeds 90% of the fair value (sales price) of the equipment. Tell's cost equals the present value of $505,000. The question does not indicate or imply that Tell guarantees any residual value or that ownership transfers at the end of the 9-year lease. Therefore, the depreciable/amortizable cost of $505,000 must be charged to depreciation/amortization over the period of use, which is the lease term of 9 years. The depreciation/amortization expense for the current year (one full year's depreciation/amortization) is $505,000 ÷ 9 years, or $56,111.

Answer 534

$30,100 Comprehensive income includes net income and other comprehensive income (OCI). OCI includes pension-related items like the implementation of prior service costs and gains and losses on the effective portion of cash flow hedges as well as unrealized holding gains or losses on available-for-sale debt securities. The impairment loss ($6,000) is already included in net income. Net income $39,000 Prior service costs related to a pension plan (17,000) Gain on effective portion of cash flow hedge 8,100 $30,100 Note: Amortization of prior service costs would be recognized in pension expense and included in net income.

Answer 535

702,000 Basic earnings per share = (Net income - Dividends on preferred stock) ÷ Weighted-average common shares. Weighted-average common shares are computed by relating the portion of time within a reporting period that common shares are outstanding. Common shares outstanding, 1/1 to 12/31 (12 months) 700,000 12/12 700,000 Common shares repurchased, 3/31 to 12/31 (9 months) 20,000 9/12 -15,000 Conversion of preferred shares, 6/30 to 12/31 (6 months) 40,000 6/12 20,000 Common shares repurchased, 12/1 to 12/31 (1 month) 36,000 1/12 -3,000 Weighted-average common shares 702,000

Answer 536

4.7 Receivables turnover is defined as net credit sales divided by average receivables. For Year 2, sales were $400,000. To get average receivables, one needs to get the net beginning and net ending receivables balances, add them, and then divide the total by 2. Beginning balance was $130,000 – $40,000, or $90,000. Ending balance was $100,000 – $20,000, or $80,000. The average balance is $85,000: ($80,000 + $90,000) = $170,000; $170,000 ÷ 2 = $85,000. The receivables turnover is thus 4.7: $400,000 ÷ $85,000 = 4.7.

Answer 537

$59,000 The capitalized costs here are generally the costs incurred after attaining technological feasibility. Hence, the coding and testing costs of $24,000 and $20,000 are capitalized, but also the costs of the product masters for training of $15,000. Thus, a total of $59,000 would be capitalized, and the rest would be expensed as research and development.

Answer 538

$190,000 Because the fair value of the land approximated the balance due on the note, neither the debtor (E & S) nor the creditor (Big State) records a gain or loss on the settlement of the debt. E &S, however, must record a gain or loss on the disposal of an asset (the land). Since the fair value of the land approximated the balance due on the note, the fair value must have declined from the purchase price (which is also the carrying value since land is not depreciable); therefore, the loss must be in the amount already paid on the purchase, or, $190,000 (the $100,000 payment and the $90,000 payments made on principal of the note (total payments - interest = $179,000 - $89,000 = $90,000)).

Answer 539

$1,000 Foreign currency amount at 09/01/X1 ($.74 x 50,000) $37,000 Less: Foreign currency amount at 09/30/X1 ($.72 x 50,000) 36,000 Foreign exchange loss $ 1,000 Note: On September 1, 20X1, the 60-day forward rate is used while the rate used on September 30, 20X1, is the 30-day rate. Since the forward contract (the derivative) is for purposes of speculation, any associated exchange gain or loss must be included in net income. FASB ASC 815-25-35-15 addresses the use of hedges to control for foreign currency exposure. If a derivative qualifies as a hedge, FASB ASC 815-25-35-1 permits companies to match the timing of the gains and losses of hedged items and their hedging derivatives. For a fair value hedge, FASB ASC 815-25-35-1 permits the hedger to record the change in the fair value of the hedged item concurrently with the gain or loss on the hedging derivative. For a cash flow hedge, the effective portion of any changes in the hedging derivative's fair value is recorded in other comprehensive income until the change in the value of the hedged item is recognized in earnings. If a derivative does not qualify as a hedge, changes in its value must be reported in quarterly earnings. Speculative contracts do not quality as hedges and are still controlled by FASB ASC 830-20-35-1. For these derivatives, the change in fair value is recognized immediately in net income.

Answer 540

As a gain in earnings at the acquisition date In a business acquisition, the acquiring corporation must recognize the assets and liabilities acquired at fair value. If the net assets acquired exceed the purchase price—a bargain purchase—the excess must be recognized as a gain in earnings at the date of the acquisition.

Answer 541

Risk of accounting loss: $230,000; Off-balance sheet risk: $0 FASB ASC 825-10-50-20 defines risk of accounting loss as the amount of write-off that a company would record if any party to an agreement failed to fully perform in accordance with the terms of the contract. Off-balance sheet risk occurs when the amount of an accounting loss exceeds the amount of the associated asset or liability recorded on the balance sheet. The maximum possible accounting loss associated with trade accounts receivable occurs if no amount of the current asset is collected. In this case, Butler's trade accounts receivable has a net book value of $230,000, which represents the maximum amount of potential write-off associated with trade accounts receivable. Butler would not be required to pay an amount in addition to the net book value of this asset, so there is no off-balance sheet risk.

Answer 542

$955,000. Accounting Standards Update (ASU) 2015-03 requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability, consistent with debt discounts; the recognition and measurement guidance for debt issuance costs were not affected by the amendments. Amortization of debt issuance costs also shall be reported as interest expense; issue costs will no longer be reported in the balance sheet as deferred charges. The carrying value of the debt, initially, the bond liability, is $990,000, computed as the number of bonds multiplied by the face amount per bond, multiplied by the issue percentage, reduced by the bond issue costs of $35,000: 1,000 bonds × $1,000 face × 0.99 = $990,000 $990,000 − $35,000 = $955,000

Answer 543

$10,000,000 While many governments fund their OPEB plans primarily on a pay-as-you-go basis, they are required to report the true liability for those benefits in their government-wide financial statements. If a government’s OPEB plan is administered through a trust that meets specified criteria in GASB Statement 75, the net OPEB liability will be reported. However, if the criteria is not met, the total OPEB liability will be reported ($10,000,000) and any assets set aside for OPEB benefits will continue to be reported as assets of the government.

Answer 544

In the government-wide statement of net position in the governmental activities column The noncurrent portion of leases financed by the general government is reported as general long-term liability. General long-term liabilities should be reported in the governmental activities column in the government-wide statement of net position.

Answer 545

$1.55 Under FASB ASC 830-30-45-3, all elements of financial statements should be translated by using a current exchange rate. For revenues and expenses, an appropriately weighted-average exchange rate for the period may be used to translate those amounts.

Answer 546

The lease payments plus residual value The lessor shall measure the lease receivable in a direct financing lease initially as the sum of the following amounts: The lease payments The unguaranteed residual value accruing to the benefit of the lessor The guaranteed residual value by the lessee or third party

Answer 547

State: $700,000; Curry: $350,000 ales taxes are classified as a form of derived tax revenue. According to GASB N50.113, revenues should be recognized when the underlying exchange transaction occurs. (On the modified accrual basis of accounting, revenues should be recognized when the underlying exchange has occurred and the resources are available.) In this question, the underlying sales transactions took place before June 30. Also, the resources are considered to be available because the resources are received in the current year or soon enough thereafter to be used to pay the current year's bills, i.e., within 60 days of year-end (15 days for remittance to the state plus 45 days for distribution to the city). Thus, the full amount collected, $1,050,000, would be recognized by either the state or the city. Distribution of the amount: The total percentage of the tax collected is 6% (4% + 2%). The amount to Curry City = $1,050,000 × 2/6 = $350,000 The amount to State = $1,050,000 × 4/6 = $700,000

Answer 548

reported as a reduction in income. FASB ASC 845-10-30-1 requires that "a transfer of a nonmonetary asset to a stockholder or to another entity in a nonreciprocal transfer should be recorded at the fair value of the asset transferred, and a gain or loss should be recognized on the disposition of the asset." Since the market value of the merchandise was less than its carrying amount, Evie Corp. should report the resulting loss as a reduction in income.

Answer 549

$50 The amount of contribution revenue recognized in an exchange transaction is reduced by the fair market value of the consideration given by the organization to the donor. The $150 received is reduced by the $100 fair market value of the theater tickets for total contribution revenue of $50.

Answer 550

the entity as a whole. FASB ASC 958-210-45-1 states that the statement of financial position “shall focus on the not-for-profit entity as a whole” and shall report the amounts of its total assets, liabilities, net assets, total net assets with donor restrictions, and total net assets without donor restrictions.

Answer 551

Both functional and natural Accounting standards for not-for-profit entities require expenses to be disclosed by both functional and natural classifications. The choice to only report one or the other is not allowable.

Answer 552

Fiduciary funds and fiduciary component units are not reported in the government-wide financial statements. Fiduciary funds and fiduciary component units represent assets held in a trust or custodial capacity by the government. They may not be used to support government programs and, as such, are not reported in the government-wide financial statements. Custodial funds are required to report a statement of changes in net position in the fund financial statements. Private-purpose trust funds are fiduciary funds, not governmental funds. Investment trust funds do not report revenues and expense in the statement of changes in net position; additions and deductions are reported.

Answer 553

By recognizing $10,000 in profit or loss and $5,000 in other comprehensive income An entire class of assets whose value can be measured reliably can be carried at fair value. This company does this for its land. At the end of the first year, the land lost value, and thus the difference lost of $10,000 is taken as a loss. When the value is regained in the second year, the prior loss is undone with a gain of $10,000, but the additional $5,000 increase in value must go to an equity account in other comprehensive income.

Answer 554

budgetary control for the general fund. Encumbrance accounting is a method of budgetary control for governmental funds, including the general fund. Encumbrances do not represent expenditures as they are a memorandum of commitments that will eventually lead to expenditures. They do not represent liabilities as the goods and services are yet to be delivered. Governmental intent to commit resources for specific uses in the future is indicated by an assignment of fund balance.

Answer 555

A strategic shift is the sale of a product line that represents 25% or more of the entity’s total revenues. In order for the sale of a portion of an entity to qualify for discontinued operations, it must represent a strategic shift for the entity, meaning that the sale will have a significant effect on the entity’s operations and financial results. A strategic shift is the sale of a product line that represents 15% (not 25%) or more of the entity’s total revenues. Discontinued operations are reported after income from continuing operations and therefore need to be reported net of tax. The cash flows of the portion of the business to be sold must be clearly distinguishable from the other operations of the portion to be sold.

Answer 556

Property tax revenue for an amount deferred because it was not available The link between government-wide and governmental fund statements requires a reconciliation to convert the governmental funds (which use the modified accrual basis of accounting) to the economic resources measurement and accrual basis of accounting used by the government-wide funds. Adjustments usually include moving transactions for general capital assets and general long-term liabilities from the operating statement to the balance sheet. Other reconciling items may include revenue and expense accruals or adding the internal service fund residual net assets. Transfers between governmental funds, a state grant awarded and received for road repairs that were completed this fiscal year, and salaries payable at the end of the current year that will be paid at the beginning of the subsequent year are reported in both statements, and would therefore not be reconciling items. Property tax revenue must be available to be recognized under modified accrual accounting; since the revenue is not available, there is no revenue recognition. However, property tax revenue would be recognized in the government-wide statement of activities, which uses full accrual accounting and is not constrained by the “availability” criteria; thus, it is the only reconciling item.

Answer 557

$48,000 This is a basket purchase transaction with one total price paid for two items. The proceeds must be allocated based on the relative fair values of each item separately. Type Market Total Stock Shares x Price = Market = Ratio x Proceeds = Allocation Common 1,000 x $36 = $36,000 = 40% x $80,000 = $32,000 $90,000* Preferred 2,000 x $27 = $54,000 = 60% x $80,000 = $48,000 $90,000 *($36,000 + $54,000)

Answer 558

For IFRS (but not U.S. GAAP), unrecognized deferred tax assets must be evaluated at the end of each year to see if they should be recognized. U.S. GAAP recognizes deferred tax assets in full and uses a valuation account if the benefit from those deferred tax assets is less likely than not. IFRS recognizes only the portion of deferred tax assets that are more likely than not to be realized. Thus, IFRS requires unrecognized deferred taxes assets to be evaluated each period.

Answer 559

$415,000 At the fund level, derived tax revenues are reported using the modified accrual method. Using modified accrual, that portion of the ending receivable which is measurable but not available, or accounted for as an allowance, is accounted for as deferred revenue. Deferred Revenues Ending receivable $600,000 Less collections June 30 through August 30 (125,000) Less ending allowance for doubtful accounts (60,000) $415,000

Answer 560

367,500 Earnings per share (EPS) is a comparison of the earnings applicable to common stock with the number of shares of common stock of that enterprise. Basic EPS is based on the weighted-average number of actual common shares (WACS) outstanding during the period. In computing WACS, retroactive application is given to stock splits and stock dividends. WACS is computed as follows: 1/1 100,000 × 1.5 × 12/12 = 150,000 4/1 30,000 × 1.5 × 9/12 = 33,750 183,750 Effect of retroactive split 2 367,500

Answer 561

The end of preceding fiscal year Form 10-Q is used to file quarterly reports with the SEC. Required financial statements include a quarterly and end of the preceding fiscal year balance sheet. If the company is subject to seasonal fluctuations, a balance sheet for the corresponding quarter of the prior fiscal year is required.

Answer 562

Increase in prepaid property taxes, 33-1/3%; Decrease in property taxes payable, 66-2/3% The payment of property taxes, when made, will be a payment covering 6 months' accrual. The payment will be made in the middle of the 6-month period covered, and thus some of the expense will have already accrued. The 6 months covered by the payment are July, August, September, October, November, and December, and the payment is made on November 1. Thus, the payment is two-thirds (4 out of 6 months) for property tax expenses already accrued and payable (lowering the payable) and one-third for expenses yet to accrue (2 out of 6 months, prepaid for November and December).

Answer 563

Form 10-K within 60 days after the end of the reporting period. The Form 10-K represents the annual report for public entities and the Form 10-Q represents the quarterly report. Entities classified as large accelerated filers must file their annual Form 10-K within 60 days of the end of the reporting period. The large accelerated filer status applies to entities with a public float of $700 million or more. The quarterly Form 10-Q must be filed within 40 days for large accelerated filers. However, this problem asks about the annual report only.

Answer 564

$1.20 The gain is the difference between the current replacement cost ($10) and price-level adjustment historical cost of $8.80 ($8 × ($121 ÷ $110)). Holding gain = $10 − $8.80 = $1.20

Answer 565

To report the change in net assets for the period The nongovernmental not-for-profit organization does not earn a profit in the sense that a for-profit entity would. Instead, the not-for-profit organization records the difference between revenues and expenses as a change in net assets for the accounting period. Each revenue, expense, gain, or loss must be classified according to the net asset class affected and reported based on restrictions or functional subclassification.

Answer 566

$20,000 When a company is bought, in whole or in part, the purchase price may exceed the fair values of all the company’s net assets. The amount of this excess is goodwill from the purchase. Purchase cost of stock $200,000 Less 30% of identifiable assets (30% of $600,000) 180,000 Excess of purchase price over fair value of assets (Goodwill) $ 20,000

Answer 567

$34,250 Under the cash basis of accounting, revenue is recognized when cash is received and expenses are recognized when cash is disbursed; no income or expense is accrued. The cash basis method of accounting is not an allowable method under GAAP unless there is no material difference from the accrual method. One way to solve this question is use the journal entry required to book the net difference between beginning and ending balances. Prepaid expenses increased $500, so debit Prepaid and credit Cash for $500. That $500 represents excessive recognition of expense under the cash basis. Accrued expenses decreased $450, so debit Accrued Expenses and credit Cash $450. The credit to cash represents excessive expensive recognition under the cash basis, for a total excess expense recognition of $950. Dannon should report accrued expenses of $34,250 ($35,200 − $950).

Answer 568

$17,000 When accounting for a lease as a sales-type or direct financing lease for a lessor, one of the lease criteria must be met. In this situation, one criterion is a transfer of title at the end of the lease. Also, when accounting for one of these leases from the perspective of the lessor, one must further decide if the lease is sales-type or direct financing. Since the transfer of title criterion is met, this is considered a sales-type lease and there could be an element of gross profit recognized by the lessor at the beginning of the lease, generally based on the difference between the sales price and the cost of the item to the lessor. Here that gross profit recognized immediately is $17,000, the difference between the selling price and the cost of the equipment ($77,000 – $60,000).

Answer 569

14% Effective interest = Carrying value of the bonds × Effective interest rate × Time period In this case: $13,016 = $185,953 × Unknown effective interest rate × 1/2 year Effective interest rate = ($13,016 ÷ $185,953) × 2 = 14%

Answer 570

both embodies an obligation to repurchase the issuer's equity shares and requires or may require the issuer to settle the obligation by transferring assets. An entity must classify as a liability a financial instrument, other than an outstanding share, that, at inception (FASB ASC 480-10-25-8): embodies an obligation to repurchase the issuer's equity shares, or is indexed to such an obligation and requires or may require the issuer to settle the obligation by transferring assets. Examples of these financial instruments include forward purchase contracts or written put options on the issuer's equity shares that are to be physically settled or net cash settled.

Answer 571

$0 Endowments that must be maintained in perpetuity (permanent endowment), as well as income from the endowment, are classified as restricted revenues.

Answer 572

$11,025 The recognized but currently unreceived income will generate a future tax consequence, a future tax liability. However, dividends received by a corporation are eligible for a dividends-received deduction (a permanent difference), and thus only a smaller taxable amount (multiplied by the tax rate) will eventually be paid because the permanent difference lowers taxable income. Taft's recorded equity in Flame earnings $180,000 Less dividends received in 20X1 30,000 Temporary difference before dividend deduction 150,000 Less dividends-received deduction (65% x $150,000) 97,500 Net amount of temporary difference $ 52,500 Times tax rate x 21% Deferred income tax liability, noncurrent $ 11,025

Answer 573

$100,000 FASB ASC 470-10-45-14 requires that short-term obligations be reported as long-term liabilities if a company (1) intends to refinance the short-term obligation on a long-term basis and (2) demonstrates the ability to refinance it a long-term basis. The intent is stated in the problem. Verona's issuance of common stock for $400,000 before the statements were issued demonstrates the ability to refinance $400,000 of the short-term obligations on a long-term basis. The balance of the obligation ($100,000) must be reported as a current liability.

Answer 574

$20,000 Style, Inc., the subsidiary, reported 20X1 earnings of $20,000 (see below): Retained Earnings (01/01/X1) $36,000 Plus 20X1 Income ? Less 20X1 Dividends (5,000) Retained Earnings (12/31/X1) $51,000 Dallas, Inc., the parent, includes 100% of Style's earnings: $20,000. The noncontrolling interest in the subsidiary net income $4,000 (20% of $20,000) is then subtracted from the combined entity's consolidated net income to derive the parent's interest in consolidated net income.

Answer 575

$151,400 The $151,400 amount is calculated as follows: Net income $150,000 Increase in accounts receivable ($23,000 – $29,000) (6,000) Increase in allowance for uncollectible accounts ($800 – $1,000) 200 Decrease in prepaid rent expense ($12,400 – $8,200) 4,200 Increase in accounts payable ($22,400 – $19,400) 3,000 Cash provided by operating activities $151,400

Answer 576

estimated historical cost. If determining the actual historical cost of general infrastructure assets is not practical because of inadequate records, public institutions reporting as special-purpose governments should report the estimated historical cost for major general infrastructure assets.

Answer 577

Fund balance—committed, $2,000,000; Fund balance—assigned, $600,000. The outstanding encumbrance would be reflected as either committed or assigned fund balance for $2,000,000, depending on the level of government that entered into the agreement with the vendor. As the vendor in this case is probably a large construction company, it is likely the city council approved the major contract. Nonspendable fund balance would reflect resources such as inventories that cannot be spent, and restricted fund balance would reflect external constraints such as those imposed by creditors or grantors. Only the general fund can have an unassigned fund balance. Any fund balance in excess of the amount of the encumbrance would be considered assigned by being accounted for in a separate governmental fund—a capital projects fund.

Answer 578

$150,000 Research is defined as a planned search or critical investigation aimed at the discovery of new knowledge with the hope that such knowledge will be useful in developing a new product or service, a new process or technique, or in bringing about a significant improvement to an existing product or process. Development is the translation of research findings or other knowledge into a plan or design for a new product or process or for a significant improvement to an existing product or process whether intended for sale or use. R&D (research and development) should be expensed if doubt exists as to whether any future benefits will be received, so both projects should be expensed. Miley should report $150,000 ($100,000 + $50,000) as R&D expense in its income statement for the year.

Answer 579

an entity should use the discount rate that would be reflected in a separate financing transaction between the entity and its customer at contract inception. If a contract does include a significant financing component, an entity should use the discount rate that would be reflected in a separate financing transaction between the entity and its customer at contract inception. That rate would reflect the credit characteristics of the party receiving financing in the contract, as well as any collateral or security provided by the customer or the entity, including assets transferred in the contract. After contract inception, an entity should not update the discount rate for changes in interest rates or other circumstances (such as a change in the assessment of the customer’s credit risk). In determining the transaction price, an entity should adjust the promised amount of consideration for the effects of the time value of money if the timing of payments provides the customer or the entity with a significant benefit of financing. If the customer paid for the goods or services in advance, and the timing of the transfer of those goods or services is at the discretion of the customer, then there is not a significant financing component.

Answer 580

The amounts and purposes of board designations of net assets with donor restrictions NFPs are required to disclose information about the nature, type, and amount of the different types of restrictions that impact how and when, if ever, the donor-restricted net assets can be used. Disclosures are also required about the amounts and purposes of board designations of net assets without (not with) donor restrictions. Any governing board actions that result in self-imposed limits on the use of resources will also be disclosed in the notes to the financial statements.

Answer 581

$700 credit to the Fair Value Adjustment account Equity investments in unconsolidated entities with readily determinable fair values are measured at fair value with any changes in fair value recognized through net income (FV-NI). The Fair Value Adjustment account increases or decreases the Investment in Equity securities such that the amount shown on the balance sheet is fair value. Prior to any current year adjustment, the carrying amount is $7,700 (cost of $7,200 increased by the Fair Value Adjustment of $500). In order to reflect a year-end fair value of $7,000, the Fair Value Adjustment account must be a credit of $700.

Answer 582

$2,400 The work-in-process and finished-goods inventories of a manufacturing concern include the applicable direct and indirect materials and labor costs and a representative share of the manufacturing overhead costs (which would include insurance on manufacturing equipment). Inventory cost should not include any general and administrative expenses such as advertising. Total costs incurred related to the manufacturing of inventory is $12,000 ($7,000 + $2,000 + $3,000). The $1,000 in advertising costs is expensed as incurred and is not capitalized to inventory. There were 1,000 units produced and 800 units sold, so 200 units remain in inventory at a cost of $2,400 ($12,000 total inventory × 200/1,000 units). Note that because no cost assumptions (i.e., LIFO, FIFO, weighted average) were provided, we can assume that all inventory was manufactured at the same cost.

Answer 583

The seller should account for any amounts received as a financial liability. When the transaction is not considered a sale, the seller/lessee should not derecognize the asset and should account for any amounts received as a financial liability. The buyer should not recognize the transferred asset and should account for any amounts paid as a receivable.

Answer 584

recognize an impairment loss of $28,500. Because the franchise is a limited-life intangible asset, the two-step impairment process should be used. The recoverability test (comparison of book value to undiscounted cash flows) indicates that the book value will not be recoverable (undiscounted cash flows of $107,000 is less than the book value of $123,500) and therefore the second step needs to be carried out. Because the fair value ($95,000) of the franchise is less than the book value ($123,500), the difference between the two values ($123,500 – $95,000 = $28,500) is the amount of the impairment loss.

Answer 585

the net change in the actuarial present value of accumulated plan benefits. The statement of changes in net assets must include the following: The change in fair value of each significant type of investment Investment income Contributions from employers Contributions from participants Contributions from other identified sources Benefits paid to participants Payments to insurance entities to purchase contracts Administrative expenses Only the net change in the actuarial present value of accumulated plan benefits is not included in this list.

Answer 586

20X1: $125,000; 20X2: $50,000 FASB ASC 360-10-35-40 provides that when an entity is classified as held for sale, the unit must be written down to the fair value, so “a loss shall be recognized for any initial or subsequent write-down to fair value less cost to sell.” Wand's 20X1 loss from operations is $100,000 and the write-down to FMV is $25,000 and is reported in 20X1. The operating loss in 20X2 is $50,000, so Wand would report a $50,000 loss from discontinued operations before income taxes in 20X2. FASB ASC 205-20-45-3 states: "In a period in which a component of an entity either has been disposed of or is classified as held for sale, the income statement of a business entity or statement of activities of a not-for-profit entity (NFP) for current and prior periods shall report the results of operations of the component, including any gain or loss recognized in accordance with paragraphs 360-10-35-40 and 360-10-40-5, in discontinued operations. The results of operations of a component classified as held for sale shall be reported in discontinued operations in the period(s) in which they occur. The results of discontinued operations, less applicable income taxes (benefit), shall be reported as a separate component of income. For example, the results of discontinued operations may be reported in the income statement of a business entity as follows: Income from continuing operations before income taxes $XXXX Income taxes XXX Income from continuing operations $XXXX ``` Discontinued operations (Note X): Loss from operations of discontinued Component X (including loss on disposal of $XXX) $XXXX ``` Income tax benefit XXXX Loss on discontinued operations XXXX Net Income $XXXX ===== "A gain or loss recognized on the disposal shall be disclosed either on the face of the income statement or in the notes to financial statements."

Answer 587

the quarterly results of operations and financial condition of a registrant. Public companies must report certain material corporate events on a more current basis than quarterly (on Form 10-Q) or annually (on Form 10-K). Form 8-K reports current events, allowing investors to obtain information in a timely manner about events material to a company’s performance. Some of the most common events reported on Form 8-K include a change in a registrant’s certifying accountant, notification about entering into material agreements (including merger agreements and sales of securities), and entering into debt or other direct financial obligations. Companies have four business days from the event date to file a Form 8-K.

Answer 588

$461,456 The value of the machine from the lease is the present value of the lease payments (using the annuity due factor) and the present value of the guaranteed residual value, over the five-year lease term, as follows: ($100,000 × 4.4651) + ($20,000 × 0.7473) = $461,456.

Answer 589

$800 The amount of consideration in a contract may vary due to discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, penalties, or other similar items, or if an entity’s entitlement to the consideration is contingent on the occurrence (or nonoccurrence) of a future event. The amount of variable consideration should be estimated by using either of the following methods: a. Expected value method: The sum of probability-weighted amounts in a range of possible consideration amounts. This method is appropriate when an entity has a large number of contracts with similar characteristics. b. Most likely amount method: The single most likely amount in a range of possible consideration amounts; the single most likely outcome of the contract. This method is appropriate when the contract has only two possible outcomes: an entity either achieves a performance bonus or does not. The most likely outcome is that Ralph receives the $1,200 bonus (likelihood = 80%), in which case Ralph would be paid a total of $3,600 ($600 × 6 months) + $1,200, or $4,800. Therefore, Ralph would recognize $4,800 ÷ 6 months ($800) each month.

Answer 590

estimated life of the underlying asset. The estimated life of the underlying asset is a fixed amount and would not be an example of a variable provision. The other answer choices are examples of common lease provisions: External market rate or index (e.g., LIBOR (London Interbank Offered Rate) or SOFR (Secured Overnight Financing Rate)) Usage of the underlying asset (e.g., miles on a leased car) Performance of the underlying asset (i.e., percentage of revenue generated from leased asset)

Answer 591

Unrestricted revenue: $975,000; Restricted revenue: $500,000 A not-for-profit entity should distinguish between contributions received with and without restrictions. The foundation should report unrestricted revenue of $975,000. This is the $875,000 contribution as well as the $100,000 in contributed services. The value of volunteer services is recognized as contributions insofar as the services require specialized skills, were provided by persons possessing those skills, and would typically have been purchased if not provided by donation. A promise to contribute a specified amount to an organization should be recorded as income immediately upon receipt of the promise. Because the promised contribution ($500,000 in this scenario) will not be collected until the subsequent year, it should be considered restricted. Because the promised contribution is expected to be collected within one year of the financial statement date, it may be measured at net realizable value.

Answer 592

governmental activities. The governmental activity which is the predominant user of the internal service funds absorbs and reports the assets and liabilities of an internal service fund that are not eliminated. In most situations, this will be the governmental activities. (GASB 2200.147–.150)

Answer 593

$5,000 When the purchase order is approved by Elm City, the estimated amount is recorded in the journal entry: Encumbrances 5,000 Fund Balance--Reserved for Encumbrances 5,000 When the purchase order is filled for $4,950, the entry is reversed, for the original estimated amount of the purchase order: Fund Balance--Reserved for Encumbrances 5,000 Encumbrances 5,000 The actual amount of expenditures may be more or less than the estimated amount, but that does not affect the amount by which the encumbrance or the Budgetary Fund Balance—Reserved for Encumbrances are reversed. Some jurisdictions require a purchase change order to adjust the original purchase order to the actual transaction amount before reversing.

Answer 594

$1,365,000 Under FASB ASC 805-20-25, the acquisition will be recorded at fair value: Investment in Trask Co. 2,400,000 Common stock ($5 x 200,000) 1,000,000 Additional paid-in capital ($7 x 200,000) 1,400,000 Legal and consulting costs are a current expense: Professional services expenses 110,000 Cash 110,000 Registration and issuance costs reduce Additional Paid-in Capital: Additional paid-in capital 35,000 Cash 35,000 The effect on Additional Paid-in Capital is: Stock issue $1,400,000 Registration and issuance costs (35,000) $1,365,000

Answer 595

A reconciliation of ending retained earnings to net cash flow from operations A reconciliation of ending retained earnings to net cash flow from operations would serve no useful purpose and is not required to be disclosed on the statement of cash flows. Each of the other items mentioned would be disclosed under the direct method.

Answer 596

In the fourth quarter only Temporary market declines expected to reverse are not recognized in interim financial statements. The decline should not be recognized until year-end.

Answer 597

$280,000 The unfunded part of the total pension cost is the total in accrued pension cost. The service and interest costs for the year add to it, and the contributions and plan return lower it. 20X1 service and interest cost $720,000 Less: Contribution to plan $400,000 Interest on contribution (10% of $400,000) 40,000 440,000 Accrued pension cost $280,000

Answer 598

The rights and obligations under an insurance contract that is not a financial instrument (because it requires or permits the insurer to provide goods or services rather than a cash settlement) but whose terms permit the insurer to settle by paying a third party to provide those goods or services FASB ASC 825-10-15-4 lists the following items that are eligible for the fair value election: a. "A recognized financial asset and financial liability, except any listed in the following paragraph b. "A firm commitment that would otherwise not be recognized at inception and that involves only financial instruments (An example is a forward purchase contract for a loan that is not readily convertible to cash. That commitment involves only financial instruments—a loan and cash—and would not otherwise be recognized because it is not a derivative instrument.) c. "A written loan commitment d. "The rights and obligations under an insurance contract that is not a financial instrument (because it requires or permits the insurer to provide goods or services rather than a cash settlement) but whose terms permit the insurer to settle by paying a third party to provide those goods or services e. "The rights and obligations under a warranty that is not a financial instrument (because it requires or permits the warrantor to provide goods or services rather than a cash settlement) but whose terms permit the warrantor to settle by paying a third party to provide those goods or services f. "A host financial instrument resulting from the separation of an embedded nonfinancial derivative instrument from a nonfinancial hybrid instrument under [FASB ASC] 815-15-25-1, subject to the scope exceptions in paragraph 8. (An example of such a nonfinancial hybrid instrument is an instrument in which the value of the bifurcated embedded derivative is payable in cash, services, or merchandise but the debt host is payable only in cash.)"

Answer 599

a decrease in a liability from primary operations. SFAC 6, Elements of Financial Statements, notes: "In concept, revenues increase assets rather than decrease liabilities, but a convenient shortcut is often to directly record reduction of liabilities." An example would be the earning of currently unearned revenue. (Unearned revenue would decrease while earned revenue would increase.) Revenues (and expenses) relate to primary operations rather than incidental transactions. Incidental transactions result in gains and losses.

Answer 600

The effect of a change in the opening balance of a valuation allowance that results from a change of circumstances ordinarily is included in income from operations. GAAP provides that only deferred tax assets (not deferred tax liabilities) be reduced by a valuation allowance, but only if it is more likely than not (i.e., a likelihood of more than 50%) that some or all of the deferred tax assets will not be realized. The valuation allowance should reduce the deferred tax asset to the amount that is more likely than not to be realized, considering both positive and negative evidence. The effect of a change in the opening balance of a valuation allowance that results from a change of circumstances ordinarily is included in income from operations. All deferred tax liabilities and deferred tax assets are classified on the balance sheet as noncurrent.

Answer 601

$51,887. When accounting for a discounted note and computing the cash proceeds, one must first find the maturity value of the note, what will be received by the holder of the note when it comes due. By the time of the discounting, some of the principal has already been paid. At the end of December, Year 2, the $50,000 will be received by the bank along with 10% interest (since the principal will have been outstanding for a whole year). Only the second installment, the final $50,000 principal plus interest of $5,000 ($50,000 outstanding balance × 0.10), will be paid to the bank when due, for a total payment at maturity of $55,000. The discounted proceeds will be based on this amount, the discount rate (0.12 × 6/12) over the discounting period (from July to December of Year 2, 6 months). The discount amount is thus: PV (Present value) = Maturity value/(1 + r)n PV = $55,000/(1 + .06)1 PV = $51,887 (rounded)

Answer 602

Held for disposal A long-lived asset classified as held for sale (disposal) must be measured at the lower of its carrying amount or fair value less cost to sell. A loss should be recognized for any initial or subsequent write-down to fair value less cost to sell. A gain should be recognized for any subsequent increase in fair value less cost to sell, but not in excess of the cumulative loss previously recognized for a write-down to fair value less cost to sell.

Answer 603

all enterprise funds. The business-like activities portion of the government-wide financial statements report the functions also reported in the enterprise funds and internal service funds providing goods and services to the enterprise funds. In this problem, the internal service funds provide goods and services only for governmental functions. Fiduciary fund information is not shown within the government-wide financial statements. Discretely presented component unit information is shown separate from the governmental and business-like activities portions on the government-wide financial statements.

Answer 604

$24,000 Capitalized computer software costs are amortized on the basis of current and future revenue with the minimal amortization being equal to straight-line amortization over the remaining life. Through the first year of the software’s life, the company has earned 60% ($300,000 ÷ $500,000) of the revenue expected to be generated by the software. Year 1 amortization will then be $24,000 (60% × $40,000).

Answer 605

$140,000 The after-tax loss from the discontinued operation is computed as follows: Sale proceeds $ 800,000 Accounts receivable $ 200,000 Inventory 500,000 Buildings $5,000,000 Accumulated depreciation 3,000,000 2,000,000 Mortgage on buildings -1,100,000 Accounts payable -600,000 Net book value 1,000,000 Loss $ 200,000 Taxes ($200,000 x .30) 60,000 After-tax loss $ 140,000

Answer 606

As an addition to net income in the operating activities section The amortization of a bond discount is the difference between cash interest and interest expense. Cash paid for interest is reported in operating activities. Amortization of a discount on bonds payable results in interest expense greater than cash interest. Because more expense has been deducted in computing income than the amount of cash paid for interest, the difference (captured in the change in the bond discount account) must be added to income to reconcile to the cash provided or used for operating activities.

Answer 607

$1,150,700 When a contract contains variable consideration, one method for determining the amount to include in the transaction price is the expected value method. In order to apply the expected value method, the contractor should have experience with similar contracts so its estimates can be as accurate as possible. The first step is to compute the amounts of the possible outcomes based upon the contract and then the contract price is computed: Completion Date Base amount Bonus amount Total contract price Probability August 1 $1,013,000 + $162,000 = $1,175,000 × 0.70 = $ 822,500 August 8 1,013,000 + 108,000 = 1,121,000 × 0.20 = 224,200 August 15 1,013,000 + 54,000 = 1,067,000 × 0.05 = 53,350 August 22 1,013,000 + 0 = 1,013,000 × 0.05 = 50,650 Contract Price $1,150,7000

Answer 608

A loss in continuing operations The bonds were sold at a discount, so their carrying value (bond face amount less unamortized discount) was less than 100. When Somar Co. retired the bonds at 105, a loss was incurred.

Answer 609

Exempt from federal taxation The joint FASB/GASB definition of governmental organizations that is included in several AICPA Audit and Accounting Guides, including State and Local Governments (paragraph 1.01), indicates that bodies corporate and politic and entities with the power to enact and enforce a tax levy are governments. Not-for-profit organizations that are not governmental are exempt from federal taxation.

Answer 610

37,000 Shares Fraction Weighted Shares Outstanding x of Year = Outstanding 33,000 (1) x 12/12 = 33,000 8,000 x 6/12 = 4,000 Total weighted-average shares outstanding = 37,000 ====== Note: The common stock dividend shares require “retroactive” treatment. They are assumed to be outstanding throughout all periods presented.

Answer 611

$53,050 We have no way of finding the unadjusted ending month balance per books in the cash account, but we can find the corrected ending cash balance from the information given by starting with the ending bank balance. The ending bank balance is $54,200 and when we add the deposits in transit and subtract outstanding checks from this balance, we should have the corrected ending balance. Thus, starting with $54,200 and adding the $350 deposit in transit, and then subtracting the $1,500 checks outstanding, we get $53,050. The other items would be adjustments to unadjusted ending cash balance, which we do not have, the check error being the company's error, not the bank's error.

Answer 612

$0 Revenue for long-term contracts is recognized over time when any one of the following criteria is met: the customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs; the entity’s performance creates or enhances an asset, such as work-in-process (WIP), that the customer controls as the asset is created or enhanced; or the entity’s performance does not create an asset with an alternative use to the entity, and the entity has an enforceable right to payment for performance completed to date. This arrangement does not qualify for revenue recognition over time, because the asset the seller is creating has an alternative use to it. Therefore, EriK must wait until completion of the contract before recognizing revenue.

Answer 613

20X2 For an imposed nonexchange form of tax, assets (cash or receivables) are recognized in the period when an enforceable legal claim has arisen, or when resources are received, whichever occurs first. Governments should recognize revenues in the period for which the taxes are levied even if the enforceable legal claim occurs in a different period. In this case, the government should recognize property tax receivable in the same period that revenues are recognized, in 20X2, the period for which they were levied and an enforceable legal claim can be made. GASB N50.114

Answer 614

Dividend per share payout ratio as numerator and earnings per share not used Dividends per share is the dividends paid out divided by total shares. Whereas the dividend payout ratio would be included in the numerator, the earnings per share is not involved, only the number of shares outstanding.

Answer 615

nature of primary activities. Many financial statement line item explanations, such as local denomination demand deposits, do not require further explanatory information. However, other line items require varying degrees of disclosure. A summary of potential additional disclosures is as follows: For assets: the nature, quality, and location; future cash flows; relation to other line items; and significant contractual, statutory, regulatory, or judicial restrictions. For assets and liabilities resulting from financial instruments or other contracts: contractual or legal terms (e.g., timing of receipts and disbursements), degree of credit or nonperformance risk, potential effect related to inability to pay or perform, and method used to determine the cash flows. Other disclosures could include equity instrument terms or conditions, potential effects of changing accounting methods, breakdown of aggregated line items, alternative measurements, and the line item’s relation to other line items.

Answer 616

$262,500 Discontinued operations include all previously unrecognized gains or losses from the sale of the discontinued component and the results of operations for the discontinued component during the period, among other gains and losses. During year 5, the division lost $240,000 and was sold for a loss of $135,000, creating a total gross loss of $375,000 ($240,000 + $135,000). On the income statement the total loss is reduced by the tax benefit associated with the loss of $112,500 ($375,000 × 30%) for a net loss of $262,500 ($375,000 − $112,500). The $115,000 loss from the first 8 months of the year is already included in the $240,000 operating loss and is not needed to solve this problem.

Answer 617

The costs, if any, that would be incurred to transport the asset or liability to (or from) its principal (or most advantageous) market The price used to measure fair value should not be adjusted for transaction costs, which are the incremental direct costs to sell the asset or transfer the liability. Note, however, that transaction costs do not include the costs that would be incurred to transport the asset or liability to or from its principal (or most advantageous) market. If location is an attribute of the asset or liability, the FASB takes the position in FASB ASC 820-10-35-8 that “the price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall be adjusted for the costs, if any, that would be incurred to transport the asset or liability to (or from) its principal (or most advantageous) market.”

Answer 618

not reported on the balance sheet but disclosed in the notes to the financial statements. When a company is obligated to pay a specified amount to a supplier even if it does not take delivery of the contracted goods, it has an unconditional purchase commitment. Such an obligation is not reported on the balance sheet but is disclosed in the notes to the financial statements at the present value of the future required payments.

Answer 619

Net income will increase by $5,800. Options do not qualify for hedge accounting. The gain or loss must be currently recognized. $43 x 2,000 = $86,000; $86,000 + $400 = $86,400 $40 x 2,000 = $80,000; $80,000 + $600 = 80,600 Gain = $ 5,800

Answer 620

$2,000. Cash paid for purchase of equipment $20,000 Less cash received from sale of equipment ($25,000 - $12,000 + $5,000 gain) 18,000 Net cash outflow from investing activities $ 2,000 ======= All of the following are cash inflows from investing activities: Receipts from sales of property, plant, and equipment and other productive assets (FASB ASC 230-10-45-12) All of the following are cash outflows for investing activities: Payments at the time of purchase or soon before or after purchase to acquire property, plant, and equipment, and other productive assets. (FASB ASC 230-10-45-13)

Answer 621

Loss on discontinued operations SFAC 6 defines comprehensive income as: “Change in equity (net assets) of an entity during a period from transactions and other events and circumstances from nonowner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners.” Loss on discontinued operations is part of net income which changes equity; therefore, it is part of comprehensive income. By definition, investments by owners are specifically excluded from comprehensive income.

Answer 622

Price A bond has a face amount of principal, which is the amount repaid to the owner of the bond at the end of its term. A bond has a coupon rate, which, when multiplied by the face (principal) amount, states the amount of (actual cash) interest paid to the bond owner annually. The value of owning the bond is the (present) value of these two rights, to be repaid the principal at the end of the bond's term, and to be paid the coupon rate of interest every year until then. The present value of these rights is the value of the bonds, hence the rational price. The present value is based on the market rate of interest, since this is the (rational) rate to charge, and discount based on what the market would require of the debtor. “Yield” is a synonym for market rate, and “par” is another term for face amount.

Answer 623

$1,138 A good or service is distinct if it is both of the following: capable of being distinct (i.e., the good or service can be used on its own or in combination with other goods or services that could be obtained elsewhere by the customer) or is separately identifiable (i.e., each obligation is distinct in terms of the contract (i.e., the seller is providing individual goods or services as opposed to providing a combined good or service in which the individual goods or services function as an input). The softener and maintenance services are both capable of being distinct and separately identifiable, and are therefore treated as as two performance obligations. The total bundle price of $1,400 would be allocated to each of them: $1,050 = $1,400 × ($1,200 ÷ $1,600) water softener $350 = $1,400 × ($400 ÷ $1,600) maintenance contract WaterWorks would recognize $1,050 from the softener installation in May and three months of maintenance revenue totaling $87.50 ($350 × 3/12), for a total of $1,138, rounded.

Answer 624

As a cash inflow of $5,000 from investing activities and a cash outflow of $1,800 from investing activities Cash received from the sale of a long-term asset ($5,000) is reported as an inflow in the investing section of the statement of cash flows. Cash used to purchase long-term assets ($1,800) is reported as an outflow in the investing section of the statement of cash flows. Although both transactions are classified as investing activities, they are not permitted to be netted together.

Answer 625

Hake will record a loss of $73,000 on the redemption of the bonds. Hake suffered a loss of $73,000 on the redemption of the bonds. The journal entry for the extinguishment of the debt would appear as follows: June 30, 20X1 Dr. Cr. Loss 73,000 Bonds Payable 1,000,000 Cash 1,020,000 Bond Discount 53,000 To record the redemption of bonds payable at 102. The semiannual interest payment which was made by Hake for June 30, 20X1, was $40,000 ($1,000,000 × .08 ÷ 2). The interest expense was $47,000 ($940,000 × .10 ÷ 2) using the effective interest rate method. The amortization of bond discount was $7,000 ($47,000 - $40,000). The unamortized bond discount as of June 30, 20X1, was $53,000 given that the unamortized bond discount on January 1, 20X1, was $60,000 ($1,000,000 - $940,000). The carrying amount of the bonds as of January 1, 20X1, ($940,000) was given in the question.

Answer 626

When considering impairment for intangible assets, only finite life intangible assets are tested for recoverability. The impairment testing process for finite life intangible assets is similar to the process used for tangible fixed assets. First, such assets are tested for impairment, and then if the carrying value is not considered to be recoverable, the amount of the impairment loss is determined as the difference between the fair value and the carrying value of the asset. The recoverability concept is not used when considering the impairment of indefinite life intangible assets.

Answer 627

Both the issuance of stock to acquire a new warehouse and the amount of cash paid for taxes during the period Information about all investing and financing activities of an enterprise during a period that affect recognized assets or liabilities, but that do not result in cash receipts or cash payments in the period (i.e., noncash transactions), shall be reported in related disclosures (FASB ASC 230-10-50-3). The acquisition of assets for stock is an example of this type of item. Disclosing the amount of cash paid during the period for interest and taxes is also required to be reported in related disclosures.

Answer 628

$429,200. The cash collected is $429,200, calculated as follows: Sales $438,000 Increase in accounts receivable ($30,400 – $21,600) 8,800 Cash collected from customers $429,200

Answer 629

Net income will increase by $2,820. The options in this situation are being used as a tool to earn a return on investment, not for hedging purposes. For that reason, the options do not qualify for hedge accounting. The gain or loss must be currently recognized in net income. The value of an option is equal to time value plus intrinsic value. At issuance the option had intrinsic value of $0 (800 shares × ($23 − $23)) and its time value was $500 (given) for a total value of $500. At December 31, the option had the following changes: Intrinsic value (($23 − $19) × 800 sh.) $3,200 Time value (given) 120 Total value $3,320 Less: Beginning value (500) Gain (loss) $2,820

Answer 630

6% The return on assets ratio relates net income to average total assets. Rate of return on assets = Net income / Average assets = $150,000 / .5 ($2,000,000 + $3,000,000) = $150,000 / .5 ($5,000,000) = $150,000 / $2,500,000 = .06 = 6%

Answer 631

Cash effects of transactions obtaining resources from owners and providing them with a return on their investment Financing activities are associated with a company's liabilities and stockholders' equity. The list of financing activities in FASB ASC 230-10-45-14 and 45-15 therefore includes cash effects of transactions obtaining resources from owners and providing them with a return on their investment.

Answer 632

The entity would allocate a portion of the contract price to the implicit promise, recognizing revenue and the related cost of the promise, as it is provided to the customer. Performance obligations identified in a contract with a customer may not always be limited to the goods or services explicitly stated in that contract. Promises implied by an entity’s customary business practices, published policies, or specific statements at the time of entering into the contract can also create a valid expectation by the customer that the entity will transfer goods or services to the customer. As such, the entity identifies the implicit promise as a performance obligation to which it allocates a portion of the transaction price, recognizing revenue and the related cost of the promise, as it is provided to the customer.

Answer 633

$82,200. To compute projected benefit obligation at the end of the year, start with the beginning-of-year balance, add service cost, add interest cost, and subtract out benefits paid out during the year. Interest cost is computed by multiplying the discount rate times the beginning year balance, so interest cost is: $72,000 × 0.10 = $7,200 Thus, the end-of-year balance is: $72,000 + $7,200 + $18,000 – $15,000 = $82,200

Answer 634

45,000 Months Weighted No. Shares x Outstanding = No. shares Shares outstanding 1/1-12/31 20,000 x 12 = 240,000 Add shares resulting from 2-for-1 20,000 x 12 = 240,000 stock split Shares issued 7/1 10,000 x 6 = 60,000 (10,000 x 1/2 year) Total shares used to calculate 20X1 earnings per share 540,000 Divided by 12 months / 12 Weighted-average shares 45,000 =====

Answer 635

Residual interest Net assets of a nongovernment not-for-profit are defined to be the residual interest in the assets of the entity that remains after deducting its liabilities. In a business enterprise, its equity represents the ownership interest, but not for a nongovernmental not-for-profit.

Answer 636

The refund liability and the contract liability should be updated annually. An entity should recognize a refund liability if it receives consideration from a customer and expects to refund some or all of that consideration to the customer. A refund liability is measured at the amount of consideration received or receivable for which the entity does not expect to be entitled; that is, amounts not included in the transaction price. The refund liability and corresponding change in the transaction price, and therefore the contract liability, should be updated at the end of each reporting period for changes in circumstances. The refund liability and the contract liability are not updated annually.

Answer 637

$21,700 This question is not asking for a full bank reconciliation. It is only asking for the cash disbursements per the company’s books for the month of April. That value can be found by adjusting the cash disbursements per the bank statement for outstanding checks previously recorded and those disbursements currently recorded but not yet paid from the bank in the following manner: $24,800 Disbursements + $3,200 April outstanding checks − $6,300 March outstanding checks = $21,700 Book disbursements The March outstanding checks are subtracted because they would have been recognized as deductions in cash on the books in March when the company wrote the checks.

Answer 638

Financial capital is applied to both currently reported net income and comprehensive income. SFAC 6, Elements of Financial Statements, contains the following definitions: Capital maintenance concept: the recovery of cost; separation of return on capital from return of capital. Financial capital concept: The effects of price changes on assets held and liabilities owed are recognized as “holding gains and losses” and included in return on capital. Physical capital concept: The effect of price changes are recognized as “capital maintenance adjustments” as a separate element of equity and would not be included in return on capital. SFAC 6 continues: "The financial capital concept is the traditional view and is generally the capital maintenance concept in present primary financial statements. Comprehensive income as defined in paragraph 70 is a return on financial capital." Thus, the financial capital maintenance approach is applied to both currently reported net income and comprehensive income.

Answer 639

$20,000 Service cost is a component of net periodic pension cost (NPPC), but it is not included with NPPC on the income statement. Rather, it is a separate line item included with compensation expense. To compute the net periodic pension cost, subtract the expected rate of return on plan assets, add the amortization of prior service cost, and add the interest cost on the pension obligation: $(35,000) + $5,000 + $50,000 = $20,000

Answer 640

28.7 Accounting receivable turnover = Net credit sales ÷ Average receivables: $1,400,000 ÷ (($120,000 + $100,000) ÷ 2) = 12.727 times in a year Turnover in days = 365 days ÷ Turnover in a year: 365 ÷ 12.727 = 28.7 (rounded)

Answer 641

Standalone selling price The standalone selling price at contract inception of the goods or services underlying each performance obligation should be used to allocate the transaction price to each of those performance obligations. The standalone selling price is the price at which the entity would sell the promised goods or services separately to a customer.

Answer 642

As a refundable advance In this case, the donor has provided resources to Gridiron University before the conditions attached to the donation, the raising of matching funds, have been met. “Restricted” and “unrestricted support” are not correct because the contribution cannot be recognized as support (revenue) until conditions have been met. “As a memorandum entry reported in the footnotes” is not correct because the cash received must be recorded in the books and records. “As a refundable advance,” considering the conditional donation as a liability called “refundable advance,” is the only correct answer.

Answer 643

$20,000 Revenues $80,000 Less: Operating expenses (50,000) Less: Income tax expense (10,000) Net income $20,000 Net income or loss for an accounting period is determined by matching realized revenues with those expenses and expired costs necessary to generate the related revenue. Revenues are inflows of assets or settlements of liabilities, during a period, from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations. Expenses are outflows of assets or incurrences of liabilities, during a period, from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations, and include Operating Expenses and Income Tax Expense. Net income is $20,000 ($80,000 − $50,000 − $10,000). Foreign currency translation adjustment gain is an item of Other Comprehensive Income (OCI), and is included in comprehensive income but not net income; OCI is reported as a direct charge or credit to equity.

Answer 644

$41,000 The term “liability method” employed by the FASB calculates the balance sheet elements (i.e., deferred tax liabilities and deferred tax assets) first and, from those figures, the amount of income tax expense is derived. Each year the adjustment required to bring deferred taxes to the desired balance is made, income tax payable or receivable is computed, and the amount of income tax expense or benefit is forced to balance the entry. All deferred tax liabilities and deferred tax assets are classified on the balance sheet as noncurrent. Deferred Tax Asset ($16,000 - $10,000) 6,000 Income Tax Expense (plug) 41,000 Deferred Tax Liability ($55,000 - $50,000) 5,000 Income Tax Payable ($120,000 × 35%) 42,000

Answer 645

No. An entity only needs to identify material performance obligations in a contract and allocate transaction price to those. The FASB decided that, for purposes of identifying performance obligation in a contract, an entity would not be required to identify goods or services promised in a contract that are immaterial in the context of the contract.

Answer 646

In cash inflow from financing activities and cash outflow from investing activities Raising cash through borrowings is a financing activity. Using cash to purchase a truck is an investing activity.

Answer 647

reported as amounts due to and due from other funds. Interfund loans should be reported as interfund receivables in lender funds and interfund payables in borrower funds, not affect the fund balance or net position of either fund involved, and not be reported as “other financing sources or uses” in the governmental fund financial statements. The transaction should be reported as a transfer from the fund that made the loan to the fund that received the loan.

Answer 648

The present value of the lease payments being a major part of the fair value The present value of the lease payments being substantially all (not a major part) of the fair value is one of the five finance lease criteria. The five FASB criteria for a finance lease are (1) transfer of ownership, (2) purchase option reasonably certain to exercise, (3) the lease term is the major part of the economic life of the asset, (4) the present value of the lease payments is substantially all of fair value, and (5) there is no alternative use for the asset.

Answer 649

the original contractual rate. The effective interest rate is based on the original contractual rate, rather than on the current interest rate or the rate specified in the restructuring agreement. Note: Under some circumstances, a debtor's interest could be a new rate, and thus “the rate specified in the restructuring agreement” could be the correct answer, but the best answer choice is “the original contractual rate.”

Answer 650

additional paid-in capital. Only additional paid-in capital is an acceptable way to account for this donated land. The land has to be added to the assets, so a memo entry is not sufficient.

Answer 651

Disclosure only Information which becomes known after the balance sheet date, but before the financial statements are issued, should be disclosed to keep the financial statements from being misleading. The gains or losses associated with the redemption and issuance of the bonds would be reported and disclosed in the 20X2 financial statements.

Answer 652

lending institution. Long-term debt often has covenants in the debt contract. Debt covenants are standards for the financial strength and performance of the borrower. These covenants are intended to protect the interest of the lending institution. Common ratios used to define debt covenants are the current ratio and the interest coverage ratio. Other covenants could include such requirements as maintaining a specific debt/equity ratio, having enough cash flow to cover interest expense, or acquiring an unmodified audit opinion. A covenant violation could result in the bonds becoming callable—giving the lending institution the right to receive the maturity value of the bonds prematurely or the right to convert the debt. Such debt would no longer be classified as long term, but would be considered a short-term liability.

Answer 653

an unrestricted component of net position. Unrestricted net position is defined by exclusion. If an item is not classified as restricted or a capital asset, then it is unrestricted. While future equipment will be a capital asset, it is not currently a capital asset.

Answer 654

Dividends paid to stockholders Comprehensive income per SFAC 6, Elements in Financial Statements, encompasses all changes in equity of a business resulting from transactions with nonowners. Specifically: "It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners." Based on this, dividends paid to stockholders would not be included in computation of comprehensive income.

Answer 655

The price at which an entity would sell a promised good or service to a customer Standalone selling price is the price at which an entity would sell a promised good or service to a customer. Transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. The transaction price might be adjusted for the effects of the time value of money, not the standalone selling price. The amount of noncash consideration, measured at fair value, is an example of a transaction price.

Answer 656

$3.79 Basic earnings per share (EPS) is net income divided by weighted-average common stock outstanding (WACSO). Net income must be reduced by preferred cumulative dividends. Net income - Preferred cumulative dividend = $236,000 - ($600,000 × 0.04) = $212,000 WACSO = 50,000 shares + (8,000 shares × 9/12) = 56,000 shares Basic EPS = $212,000 ÷ 56,000 shares = $3.79/share

Answer 657

amortized cost. Kale Co. should account for the bonds at amortized cost. Amortized cost is acquisition cost adjusted for any unamortized premium or discount. The FASB states investments in debt securities shall be classified as held-to-maturity only if the reporting entity has the positive intent and ability to hold those securities to maturity.

Answer 658

program revenues. Programs are financed with program revenues and general revenues. Program revenues are derived directly from the program itself or from parties outside the reporting government's taxpayers or citizenry, as a whole; they reduce the net cost of the function to be financed from the government's general revenues. Financing from outside parties that is restricted to a specific program or programs is considered program revenue.

Answer 659

All of the options listed here for reporting collections are permitted by the FASB. The FASB permits three options for reporting collections: 1. Capitalize collections purchased or donated after the effective date of the FASB’s guidance on accounting for collections (and recognize contributions revenue equal to the fair value of such collections that are donated). 2. Do not capitalize collections. (No contributions would be reported for donated collections, and expenses would be reported for purchases of collections.) 3. Capitalize all collections purchased or donated (and recognize contributions revenue equal to the fair value of the collections that are donated). Therefore, all of the options listed in the answer choices are permitted by the FASB.

Answer 660

As a component of income from continuing operations FASB ASC 250-10-45-18 requires that whenever a change in accounting principle is inseparable from a change in an accounting estimate, the change should be considered as a change in estimate. Changes in estimates are handled prospectively. That is, previously reported information in previous financial statements is not adjusted, nor is a cumulative effect of the change reported. Prospective treatment only requires utilization of the change(s) in the current period as it effects the current period's income. It is part of income from continuing operations because no special disclosure is required on the face of the income statement under the prospective approach.

Answer 661

Financing activity inflow The cash flow statement for a not-for-profit is similar to a business cash flow statement. In a modification from the business cash flow statement, cash contributions received from donors who have restricted the use to long-term purposes are reported as financing activities. Thus, “operating activity inflow” and “investing activity inflow” use the wrong categories of cash flows. “As a noncash transaction” is incorrect because cash is clearly received in this transaction.

Answer 662

Entity disclosure of its profit margin on contracts for each significant class of customers Revenue recognition disclosure requirements are intended to provide financial statement users with comprehensive information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from a reporting entity’s contracts with customers. A reporting entity is required to provide information about revenue recognized from contracts with customers, including a breakout of revenue into appropriate categories; contract balances, including the opening and closing balances of receivables, contract assets, and contract liabilities; performance obligations, including the transaction price that is allocated to the remaining performance obligations in a contract; significant judgments (and changes in judgments) made in applying the requirements to those contracts; and quantitative and/or qualitative information about assets recognized from the costs to obtain or fulfill a contract with a customer. Entities do not need to disclose profit margin information on contracts.

Answer 663

$0 Available-for-sale debt securities are carried on the balance sheet at fair value. Unrealized changes in fair value between periods are reported in other comprehensive income for the period. Gains and losses are not reported on the income statement until realized. Items in other comprehensive income are reported net of their effective tax. Dodd would recognize $0 in gain on its income statement. The unrealized gain in other comprehensive income is $4,800 ($6,000 gain × (1 – .20 tax rate)).

Answer 664

$5,200. In an operating lease, the lessee amortizes its right-of-use asset at an amount so that the total of interest expense and amortization will be a straight-line amount equal to the annual payments ($12,000 per year). Interest the first year will be $6,800 (10% × ($80,000 − $12,000)). So, amortization will be $5,200 ($12,000 − $6,800).

Answer 665

decrease the operating income for the period 20X2 by the decrease to fair value, $50,000. When a class of assets' fair value can be reliably measured, a corporation applying IFRS can elect to apply the revaluation model to the class of assets. When the carrying value of the assets differs materially from the fair value of the assets, a revaluation must occur, with any increase being included in asset revaluation surplus, an equity account, like other comprehensive income, and a decrease being accounted for as an other loss included in income from operations.

Answer 666

Subsequent events Examples of past events and current conditions potentially impacting the entity’s future line items and cash flows but which have not yet been incorporated into financial statement line items include existing or potential litigation; suspected or known statute, judicial, regulatory, or contract violations; unrecognized existing commitments expected to be recognized in the future; events where significant uncertainty led to the decision to not recognize the event; and subsequent events. Items not necessarily impacting line items that may require disclosure include dependency on one or a few customers or suppliers for profitability, input or output market volatility, uncertainty regarding an entity’s access to markets for inputs or outputs or ability to maintain a qualified workforce, and other significant specific entity risk. Segment reporting and related party transactions are considered to be reporting entity disclosures, and the timing of asset cash flows is considered a financial statement line item explanation.

Answer 667

$150,000 Quality control during commercial production, including routine testing, is not included. Depreciation on equipment with alternative uses is included. Contract services for another entity are not included. Laboratory research aimed at discovery of new knowledge $ 75,000 Design of tools, jigs, molds, and dies involving new technology 22,000 Depreciation on equipment acquired 2 years ago, having an estimated useful life of 5 years with no salvage value, used in various R/D projects 30,000 Research and development services performed by Stone Co. for Metal, Inc. 23,000 Total $150,000

Answer 668

$90,000. First, add the beginning inventory and purchases in the cost column: $180,000 + $1,020,000 = $1,200,000 When seeking the lower of cost or market method for the retail method, add, in the retail column, first only the beginning inventory, the purchases, and the net markups: $250,000 + $1,575,000 + $175,000 = $2,000,000 Divide these subtotals, to get the cost-to-retail ratio: $1,200,000 ÷ $2,000,000 = 0.6 Next, from the subtotal in the retail column, subtract the sales, normal losses, and markdowns, leaving an ending inventory, at retail, of $150,000: $2,000,000 – $1,705,000 – $20,000 – $125,000 = $150,000 The final step to get the ending inventory at lower of average cost or market is to take the ending inventory at retail of $150,000 and multiply it by the cost to retail ratio of 0.6: $150,000 × 0.6 = $90,000 Note: Inventory measured using any method other than LIFO or the retail inventory method (e.g., FIFO or average cost) is measured at the lower of cost and net realizable value (NRV), which is defined to be the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. If the NRV of inventory is lower than its cost, the difference is recognized as a loss in earnings in the period in which it occurs.

Answer 669

$350,000. Because progress on the contract cannot be reasonably measured, Stewart would use the point-in-time approach and wait until 20X5 to recognize all of the gross profit on the contract. At the end of the contract, total gross profit is equal to $350,000, computed as contract price less cost to complete as follows: $1,050,000 – ($450,000 + $250,000) = $350,000. This is the amount Stewart should recognize as gross profit in 20X5. No gross profit would have been recognized in 20X4.

Answer 670

$6 million All of the costs an entity incurs to develop the technological feasibility of computer software are expensed ($4 million + $2 million = $6 million). Technological feasibility has occurred when the software is ready to be sold or leased to customers. Customer support and maintenance costs are also expensed. The costs of producing product masters after technological feasibility is achieved are capitalized.

Answer 671

Program services: $6,000; Fundraising: $4,000; General services: $0 FASB ASC 958-720-45-29 through 45-37 states that joint costs should be allocated between fundraising and the appropriate program or management and general function if three criteria are met. Otherwise, all of the joint costs should be considered fundraising costs (not one of the answer choices given). The criteria are purpose, audience, and content. The purpose of the joint activity must include accomplishing program or management and general functions, with a specific activity by the audience and a specific activity by the recipient to that end. If the criteria are not met, all the costs are considered fundraising costs. Fundraising activities that are incidental to program or management and general activities would not require all costs to be considered fundraising costs or to be allocated.

Answer 672

Debit inventory for $20 and credit expense for $20 Under IFRS, inventory is carried at the lower of cost or net realizable value (NRV). This situation typically arises when inventory has deteriorated, has become obsolete, or market prices have declined. Write-downs taken to reduce inventories to the lower of cost or NRV are reversed for subsequent increases in value. At the end of year 2, cost was $100 and NRV was $150; inventory should be carried at the lower amount of $100. Since the inventory was previously written down to $80, the year 2 journal entry is: Inventory 20 Inventory Expense 20 Some companies prefer to use an allowance account for inventory write-downs and recoveries. Under those circumstances, the year 2 journal entry would be: Allowance to Reduce Inventory to NRV 20 Recovery of Inventory Loss 20 IAS 2.33 requires that any write-down of inventory to NRV is recognized as an expense in the period in which it occurs. Any subsequent increases in NRV of inventory previously written down are recognized as a reduction on inventory expense in the period in which they occur (up to the amount of the original write-down).

Answer 673

$77,000 A departure from the cost basis is required when the utility of goods is no longer as great as cost; for inventory, the loss should be recognized in the period in which the decline takes place. Inventory measured using any method other than LIFO or the retail inventory method (e.g., FIFO or average cost) is measured at the lower of cost and net realizable value (NRV), which is defined to be the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. If the NRV of inventory is lower than its cost, the difference is recognized as a loss in earnings in the period in which it occurs. In this case, market value will be the replacement cost unless replacement cost exceeds net realizable value (NRV) (estimated selling price less costs of completion and disposal), in which case market will be net realizable value (the ceiling); OR replacement cost is less than net realizable value reduced by a normal profit margin (the floor), in which case market will be the floor. NRV (ceiling) $125,000 – $10,500 = $114,500 Replacement cost = $ 75,000 NRV - Normal profit (floor) $114,500 – (30% × $125,000) = $ 77,000 Garcel should report inventory at $77,000, the lower of cost or market. (Note: market cannot be less than the floor value of $77,000.)

Answer 674

Revenues, expenses, gains, losses, net income or loss, and other comprehensive income are reported in the consolidated financial statements at the consolidated amounts, which include the amounts attributable to the owners of the parent and the noncontrolling interest. FASB ASC 810-10-45-19 requires that the consolidated amounts of these items (revenues, expenses, gains, losses, net income or loss, and other comprehensive income) be reported on the income statement. The amount of consolidated net income attributable to the parent and to the noncontrolling interest must be clearly identified and presented on the face of the consolidated statement of income.

Answer 675

decrease in the first quarter by the amount of the market price decline and increase in the third quarter by the amount of the decrease in the first quarter. FASB ASC 270-10-45-6 provides that inventory losses from market declines should be recognized in the interim period in which the decline occurs. If these losses are recovered in a later period a gain should be recognized in that period but these gains “should not exceed previously recognized losses.” In regard to the situation described in the question, the dollar amount of inventory would decrease by the amount of price decline in the first quarter and increase by the same amount in the third quarter.

Answer 676

The expected value method or the most likely amount method An entity should apply either the expected value method or the most likely amount method consistently throughout the contract, and should consider all of the historical, current, and forecasted information that is reasonably available to identify a reasonable number of possible consideration amounts. The expected value is the sum of probability-weighted amounts in a range of possible consideration amounts. An expected value may be an appropriate estimate of the amount of variable consideration if an entity has a large number of contracts with similar characteristics. The most likely amount is the single most likely amount in a range of possible consideration amounts, that is, the single most likely outcome of the contract. The most likely amount may be an appropriate estimate of the amount of variable consideration if the contract has only two possible outcomes; for example, an entity either achieves a performance bonus or does not.

Answer 677

The change in the liability is recognized in profit or loss. A decommissioning liability is a term used by IFRS (International Financial Reporting Standards) and is similar to asset retirement obligations (AROs) under U.S. GAAP. Decommissioning liabilities are initially recognized as a part of the cost of an item of property, plant, and equipment (e.g., a liability that was recognized by the operator of a nuclear power plant for costs that it expects to incur in the future when the plant is shut down (decommissioned)). Since the change in the liability account would exceed the carrying amount of the related asset (i.e., fully depreciated), the change would be recognized in profit or loss.

Answer 678

IFRS. IFRS 16, Leases, includes a specific recognition exemption for low-value lease assets (approximately $5,000) such as cell phones and computers; these leases can be expensed rather than capitalized. FASB ASC Topic 842, Leases, does not list a specific cost threshold, although U.S. GAAP does permit “immaterial” assets to be expensed rather than capitalized.

Answer 679

20X2: $91,000; 20X1: $(175,000) The gain or loss from the disposal should be reported separately net of income tax effects, as a component of income. Loss in 20X1: $250,000 - (.3 x $250,000) = $175,000 Gain in 20X2 Gain on disposal $450,000 Loss on operations 320,000 Gain before taxes $130,000 Tax at 30% 39,000 Gain from discontinued operations $ 91,000 FASB ASC 205-20-45-3 states: "In a period in which a component of an entity either has been disposed of or is classified as held for sale, the income statement of a business entity or statement of activities of a not-for-profit entity (NFP) for current and prior periods shall report the results of operations of the component, including any gain or loss recognized in accordance with paragraphs 360-10-35-40 and 360-10-40-5, in discontinued operations. The results of operations of a component classified as held for sale shall be reported in discontinued operations in the period(s) in which they occur. The results of discontinued operations, less applicable income taxes (benefit), shall be reported as a separate component of income. For example, the results of discontinued operations may be reported in the income statement of a business entity as follows: Income from continuing operations before income taxes $XXXX Income taxes XXX Income from continuing operations $XXXX ``` Discontinued operations (Note X): Loss from operations of discontinued Component X (including loss on disposal of $XXX) $XXXX ``` Income tax benefit XXXX Loss on discontinued operations XXXX Net Income $XXXX ===== "A gain or loss recognized on the disposal shall be disclosed either on the face of the income statement or in the notes to financial statements."

Answer 680

Inventory losses generally should be recognized in the interim statements. Under FASB ASC 270-10-45-4, interim financial reports should be based on the principles, practices, and policies used in the preparation of the last annual report. Other-than-temporary market declines in inventory should be recognized. If losses recognized in early interim periods are recovered in the same year, such recoveries are recognized as gains in the appropriate interim periods.

Answer 681

$8,000 gain. The bonds were issued at a premium of $40,000 ($1,040,000 – $1,000,000). The premium is amortized using straight-line, over the term of the bonds, $40,000 ÷ 10 years (from January of Year 1 to January of Year 11), or $4,000 premium amortized each year. The bonds were called on July 1, Year 6, for $1,010,000, the call price (1,000 bonds × $1,000 per bond × 1.01 call percentage). By July 1, Year 6, 5-1/2 years have gone by from the issuance on January 1, Year 1. Thus, the remaining unamortized premium on the bonds is the initial total of $40,000 – (5.5 years × $4,000), or $18,000 ($40,000 – $22,000). The call price of the bonds was $1,010,000 and the carrying value of the bonds was $1,018,000 ($1,000,000 + $18,000), so the debt was paid for less than the carrying amount, and a gain of the $8,000 difference is recognized ($1,018,000 – $1,010,000).

Answer 682

$400,000 In-process research and development results are classified as intangible assets with indefinite lives until the research and development phase is complete or the project is abandoned. These assets are originally recorded at fair value (i.e., $400,000) and will be subject to impairment tests.

Answer 683

$250,000 The single-step income statement presents all revenue and gains in the upper part of the statement. Purchase discounts are shown as deductions in the expense section. Recovery of accounts written off has no effect on the income statement since cash is increased and allowance for doubtful accounts is decreased.

Answer 684

concentration of credit risk. Credit risk is the potential loss from any party to an agreement failing to perform. Credit risk must be disclosed. Off-balance sheet risk occurs when the amount of a loss exceeds the related asset. Market risk disclosure is encouraged, but not required.

Answer 685

may be included in the basic financial statements or in the required supplementary information (RSI). Governments with significant budgetary perspective differences that preclude providing budgetary comparisons for the general fund and each major specific revenue fund are required to present budgetary comparison schedules as required supplementary information (RSI). Other governments are encouraged to provide the budgetary comparison statement as RSI but may include it as part of the basic financial statements. Budgetary comparison statements are not listed among the items to be included in management's discussion and analysis (MD&A).

Answer 686

$42,000 When computing the income share for an investor, first deduct the cumulative preferred dividends from net income. Moss' share of preferred dividends = 20% x 10% x $100,000 = $2,000 Earnings attributable to common shareholders = $60,000 - 10% x $100,000 = $50,000 Moss' share of common earnings = 80% x $50,000 = $40,000 Moss' total equity in Dubro earnings = $2,000 + $40,000 = $42,000 FASB ASC 323-10-35-16 states: “If an investee has outstanding cumulative preferred stock, an investor shall compute its share of earnings (losses) after deducting the investee's preferred dividends, whether or not such dividends are declared.” These amounts may be adjusted later into consolidated statements.

Answer 687

Both I and II GASB 1300.109.c states that enterprise funds should be employed when the pricing policies of the activity establish fees and charges to external users designed to cover its costs, including capital costs. Covering costs is an important objective of a lottery operation, so a lottery should be accounted for in an enterprise fund. GASB Ho5.102 notes that accounting for government-operated hospitals financed in whole or in part by fees charged are usually reported in an enterprise fund. Note: Governmental hospitals may also be component units

Answer 688

$864,884 This question is about the computation of the issue price for a bond. The bonds will pay semiannually, and thus will pay $40,000 twice each year, computed as follows: Face amount of $800,000 × 10% coupon × 6/12 (half-year) = $40,000 The yield of the bonds is 8% annually, but in half-year periods it is 4% a half-year. The present value of the bonds is thus the $40,000 multiplied by the present value of the ordinary annuity for 10 periods and 4%, plus the $800,000 par value of the bonds multiplied by the present value of $1 at 10 periods, 4%: Issue price = ($40,000 × 8.11090) + ($800,000 × 0.67556) = $324,436 + $540,448 = $864,884

Answer 689

$525,000 In the retail column, add the beginning inventory and purchases to the net markups for a subtotal of $960,000: $920,000 + $40,000 = $960,000 Next, divide the cost of $600,000 by this subtotal: $600,000 ÷ $960,000 = 0.625 Then, get the ending inventory at retail, the $960,000 subtotal less the net markdowns and sales for a total of $120,000: $960,000 – $60,000 – $780,000 = $120,000 Multiply the ending inventory at retail by the cost to retail percentage of 0.625 (62,5%) to reach the ending inventory at cost: $120,000 × 0.625 = $75,000 Cost of sales is the beginning inventory and purchases at cost, less the ending inventory at cost: $600,000 – $75,000 = $525,000 Note: Inventory measured using any method other than LIFO or the retail inventory method (e.g., FIFO or average cost) is measured at the lower of cost and net realizable value (NRV), which is defined to be the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. If the NRV of inventory is lower than its cost, the difference is recognized as a loss in earnings in the period in which it occurs.

Answer 690

$5,700,000 Mint Corp.'s current assets on December 31, 20X1: Cash $ 600,000 Accounts receivable (net) 3,500,000 Costs in excess of billings on long-term contracts 1,600,000 Total current assets $5,700,000 Current assets consist of cash and other assets reasonably expected to be realized in cash or sold or consumed in operations within one year or an operating cycle, whichever is longer. It is important to note that Mint's trial balance has not been adjusted for income taxes. Since there are no temporary or permanent differences, Mint's taxable income (for tax purposes) and income before income taxes (for financial reporting purposes) is $1,500,000 (earnings from long-term contracts of $6,680,000 less costs and expenses of $5,180,000). Mint's income tax expense for 20X1 is $450,000 ($1,500,000 × 30%). Therefore, Mint will have no “prepaid taxes” once the trial balance is adjusted for income taxes. The balance in the unadjusted Prepaid Taxes account will be transferred to the Income Tax Expense account.

Answer 691

Both I and II GASB N50.115 states that governments should recognize property tax revenues in the period for which the taxes are levied even if a legal claim or actual payment occurs in a previous period. Property taxes are often levied in the fiscal year prior to the year in which they legally can be expended. To gain accounting control over the receivable, it should be recorded at the time of levy. However, the offsetting credit should be to a deferred revenue account since the revenue, although measurable, is not “available” until the following fiscal year. If previously levied, taxes collected in advance should be recorded with a debit to cash and a credit to taxes receivable. If not previously levied, the taxes collected should be recorded with a debit to cash and a credit to deferred revenues.

Answer 692

Both data covering financial trends and fiscal years A comprehensive annual financial report (CAFR) includes an introductory section, financial section, and statistical section. The financial section includes the financial statements, auditor’s report, and required supplementary information for the financial statements prepared for the required fiscal years. The statistical section includes financial, economic, and demographic information and their associated trends over the fiscal years presented in the financial statements and data not confined to the fiscal-year approach required of the financial statements.

Answer 693

$71,200 Accrual-basis net income is computed as follows: Beginning Effect on of Year End of Year Accrual Net Income Cash-basis net income $70,000 Accounts payable $ 3,000 $ 1,000 2,000 Unearned revenue 300 500 -200 Wages payable 300 400 -100 Prepaid rent 1,200 1,500 300 Accounts receivable 1,400 600 -800 Accrual net income $71,200

Answer 694

The lessee includes the nonlease component when computing the present value of the lease payments. The lessee excludes (not includes) the nonlease component when computing the present value of the lease payments. The other answer choices are correct: If the component cost represents a transfer of a good or service to the lessee, it is treated as a nonlease component. Nonlease components are expensed by the lessee. The lessee allocates the consideration to lease and nonlease components on a relative standalone price basis.

Answer 695

Decrease goodwill by $13,000 Under IFRS, impairment is measured at the level of the cash generating unit. Total carrying amount $45,000 Recoverable amount 32,000 Impairment $13,000

Answer 696

If an entity anticipates holding the security beyond maturity, it should still be classified as held-to-maturity. In order for the investment to be as a held-to-maturity (HTM) investment, the reporting entity must have positive intent and ability to hold the debt security to maturity. An investment in a debt security should not be included in this category if the entity has the intent to hold the security for an indefinite period. Held-to-maturity securities are accounted for using the amortized cost method, and are carried at original cost adjusted for the amortization of any discount or premium. Examples of held-to-maturity debt securities include both convertible debt and commercial paper.

Answer 697

the amount of the fixed lease payments for the original lease period. The amount of the fixed lease payments for the original lease period would not be a factor in assessing whether to extend a lease as they would be a sunk cost and not relevant. The amount of lease payments in any optional period, the amount of contingent payments, and costs relating to the termination of the lease are all factors an entity should assess in determining whether the lessee has a significant incentive to exercise an option to extend the lease.

Answer 698

The dividends on the noncumulative preferred stock and the current-year dividends on the cumulative preferred stock should be added to the net loss. In determining basic earnings per share, cumulative preferred dividends reduce the amount available for common shareholders. Consequently, net income should be reduced or net loss increased for the amount of the cumulative dividend.

Answer 699

$75,000 The unrestricted cash gift and the gift restricted for scholarships should be reported as contribution revenue currently. The naming of the college as a beneficiary in a will can be changed and is dependent upon future uncertainties. It should not be recognized at this time.The unrestricted cash gift and the gift restricted for scholarships should be reported as contribution revenue currently. The naming of the college as a beneficiary in a will can be changed and is dependent upon future uncertainties. It should not be recognized at this time.

Answer 700

$7,600 FASB ASC 830-10-45-17 provides that remeasurement for transactions denominated in a currency other than the functional currency will give rise to a “foreign currency transaction gain or loss that generally shall be included in determining net income for the period in which the exchange rate changes.” FASB ASC 830-30-45-12 states, “Translation adjustments shall not be included in determining net income but shall be reported separately and accumulated in comprehensive income.” Based on this, Park should include the $7,600 remeasurement gain in its income statement, but not the translation gain.

Answer 701

Fund financial statements Of the answer choices provided, only the fund financial statements are a minimum required report for the basic financial statements. The required basic financial statements include the following: Government-wide financial statements, including the statement of net position and statement of activities Governmental funds financial statements, including the balance sheet; statement of revenues, expenditures, and changes in fund balances; and general fund and major special revenue funds statement of revenues, expenditures, and changes in fund balances Proprietary funds financial statements Fiduciary funds (and fiduciary component units) financial statements

Answer 702

potential common shares of the parent for consolidated diluted EPS. Securities of a subsidiary that are convertible into parent company's common stock are potential common shares for diluted EPS.

Answer 703

$1,000 Note: The question asks for the allowance for discounts, not the allowance for uncollectible accounts. Only receivables in the “0-15 days” age category are eligible for the cash discount (2/15, net 30) on December 31, 20X1. Allowance = Amount x Percent taking discount x Discount rate for discounts = $100,000 x 50% x 2% = $1,000

Answer 704

139,008 In computing earnings per share, the weighted average of common stock outstanding is number of shares outstanding at the beginning of the year weighted by time for any change in shares outstanding. In this problem, the weighted average is: ``` Original shares outstanding 100,000 4/1 issue - 30,000 x 9/12 22,500 6/1 issue - 36,000 x 7/12 21,000 143,500 Effect of stock dividend x 1.05 150,675 Treasury stock acquired: 35,000 x 4/12 (11,667) Weighted average outstanding 139,008 ```

Answer 705

$7.36 Convertible bonds do not affect basic earnings per share. They are used in computing diluted earnings per share. When the preferred stock dividend preference is cumulative, the current-year dividend on preferred stock must be deducted each year in computing the numerator for basic earnings per share, regardless of the amount of preferred dividends actually declared and/or paid. Comma's basic earnings per share for the current year is: ($200,000 - $16,000) ÷ 25,000 weighted-average shares outstanding $184,000 ÷ 25,000 shares = $7.36 per common share

Answer 706

$545,000 Regardless of whether the direct or indirect method is used to determine cash flows from operating activities, the following items are required to be disclosed: Amount of income taxes paid during the period ($325,000) Amount of interest paid during the period ($220,000) $325,000 + $220,000 = $545,000

Answer 707

Other gain/loss: $(4,000) FASB ASC 470-60-35-2 requires that a debtor in a troubled debt restructuring recognize a gain measure as “the excess of (i) the carrying amount of the payable settled…over (ii) the fair value of the assets transferred to the creditor.” The total gain/loss in this case is the difference between the carrying value of the debt, $105,000, and the carrying value of the machine, $109,000 and its fair value of $96,000 conceivably could be deemed to be an impairment loss. However, we do not have enough information to know that this $13,000 part of the loss qualifies as an impairment loss. Nevertheless, even if it did, it would be included in income from continuing operations. The best answer is that the $4,000 net loss should be recognized as an ordinary loss to be included in income from continuing operations.

Answer 708

The SEC issues Financial Reporting Releases that usually agree with U.S. GAAP. The Securities and Exchange Commission (SEC) is a governmental entity created to protect the interest of investors by ensuring full and adequate disclosure by publicly traded companies. Although the SEC has the authority to establish standards, it has generally deferred to the Financial Accounting Standards Board (FASB) or its predecessors to generate U.S. accounting standards. The SEC does issue its own rules in the form of Financial Reporting Releases, which generally agree with U.S. GAAP.