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Flashcards in 11.11.18 Deck (19)
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1
Q

An entity that maintains a defined benefit pension plan for its employees reports an unfunded projected benefit obligation (PBO). This amount is the

A

Excess of the PBO over the fair value of plan assets.

If the PBO exceeds the fair value of plan assets, the employer must recognize a liability equal to the unfunded PBO. This liability reflects the funded status of the pension plan.

2
Q

Which of the following expenditures qualifies for asset capitalization?

A

Legal costs associated with obtaining a patent on a new product.

Patents may be purchased or developed internally. The initial capitalized cost of a purchased patent is normally the fair value of the consideration given, that is, its purchase price plus incidental costs, such as registration and attorney’s fees. Internally developed patents are less likely to be capitalized because related R&D costs must be expensed when incurred. Thus, only relatively minor costs can be capitalized, for example, patent registration fees and legal fees.

3
Q

On January 1, Blaugh Co. signed a long-term lease for an office building. The terms of the lease required Blaugh to pay $10,000 annually, beginning December 30, and continuing each year for 30 years. The lease qualifies as a capital lease. On January 1, the present value of the lease payments is $112,500 at the 8% interest rate implicit in the lease. In Blaugh’s December 31 balance sheet, the capital lease liability should be

A

$111,500.

A lease payment has two components: interest expense and the portion applied to the reduction of the lease obligation. The effective-interest method requires that the carrying amount of the obligation at the beginning of each interest period be multiplied by the appropriate interest rate to determine the interest expense. The difference between the minimum lease payment and the interest expense is the amount of reduction in the carrying amount of the lease obligation. Consequently, interest expense is $9,000 ($112,500 BOY liability balance × 8% implicit rate), and the reduction in the lease obligation is $1,000 ($10,000 cash – $9,000 interest expense). The new balance of the lease obligation is thus $111,500 ($112,500 – $1,000).

4
Q

The modified accrual basis of accounting is appropriate for preparing the fund financial statements for which of the following fund categories of a county government?

Governmental:
Proprietary:

A

Yes
No

The modified accrual basis is required for the statements of all governmental funds. The accrual basis is used for the statements of proprietary and fiduciary funds.

5
Q

When the equity method is used to account for investments in common stock, which of the following affects the investor’s reported investment income?

Goodwill amortization related to the purchase:
Cash dividends from the investee:

A

No
No

Amortization of goodwill is prohibited and therefore does not reduce investment income. Moreover, equity method goodwill is not separately reviewed for impairment because it is not separate from the investment. The receipt of a cash dividend from the investee also does not affect equity-based earnings. The entry is to debit cash and credit the investment.

6
Q

A company sponsors two defined benefit pension plans. The following information relates to the plans at year end:

Plan A
Fair value of plan assets: $800,000
Projected benefit obligation: $1,000,000

Plan B
Fair value of plan assets: $100,000
Projected benefit obligation: $700,000

What amount(s) should the company report in its balance sheet related to the plans?

A

Liability of $200,000; asset of $300,000.

The balance sheet must report the full under- or overfunded status of the pension plan at year-end as a liability or asset. The funded status of a pension plan is the difference between the fair value of the plan assets and pension benefit obligation (PBO) at the reporting date. An employer that sponsors multiple defined benefit plans must recognize an asset for all overfunded plans and a liability for all underfunded plans (the asset and liability recognized cannot be netted). Plan A is underfunded by $200,000 ($800,000 FV of PA – $1,000,000 PBO), and the company must recognize a liability. Similarly, Plan B is overfunded by $300,000 ($1,000,000 FV of PA – $700,000 PBO), and the company recognizes this as an asset.

7
Q

A foreign subsidiary of a U.S. parent company should measure its assets, liabilities, and operations using

A

The subsidiary’s functional currency.

The functional currency is the currency of the primary economic environment in which the entity operates. Normally, that environment is the one in which it primarily generates and expends cash. The subsidiary’s functional currency is the currency that is used to measure its liabilities, assets, and operations. At the date a foreign currency transaction is recognized, each asset, liability, revenue, expense, gain, or loss resulting from the transaction must be measured in the functional currency of the recording entity. If an entity’s books of record are not maintained in its functional currency, remeasurement into the functional currency is required before translation into the reporting currency.

8
Q

On December 1, Year 4, Money Co. gave Home Co. a $200,000, 11% loan. Money paid proceeds of $194,000 after the deduction of a $6,000 nonrefundable loan origination fee. Principal and interest are due in 60 monthly installments of $4,310, beginning January 1, Year 5. The repayments yield an effective interest rate of 11% at a present value of $200,000 and 12.4% at a present value of $194,000. What amount of income from this loan should Money report in its Year 4 income statement?

A

$2,005.

Under the effective-interest method, the effective rate of interest is applied to the net carrying amount of the receivable to determine periodic interest revenue. Thus, interest revenue from the loan for the month of December equals $2,005 [$194,000 × 12.4% × (1 ÷ 12)].

9
Q

At the beginning of the year, Lewis Corporation had 100,000 shares of common stock outstanding. During the year, the following transactions occurred:

April 1: Issued 10,000 shares in exchange for land
July 1: Declared and distributed a 10% stock dividend
October 1: Purchased 5,000 shares of treasury stock

The number of shares that Lewis should use when computing earnings per share at the end of the year is

A

$117,000.

10
Q

Fact Pattern: Society is a nongovernmental not-for-profit organization. Recently, Food Company made an oral conditional promise to donate $20,000 to Society contingent upon its recognition as “best foundation of the year” by local government. The $20,000 is restricted to construction of a children’s library.

In Year 2, Society is recognized as “best foundation of the year” by local government. However, due to financial difficulties, Food Company can offer only $5,000 in Year 2 but cannot fulfill its promise until Year 3. How should the event be reported on Society’s statement of financial position for Year 2?

Assets:
Liabilities:
Net Assets with Donor Restrictions:

A

Increase
No effect
Increase

A conditional promise to give is an oral or written agreement to contribute assets to another entity that is contingent on a condition or event. Because Society was recognized as “best foundation of the year” by local government, the donor-imposed condition was satisfied. The promise is recognized as revenue when the condition is substantially met regardless of when the promise is fulfilled. The contribution of $20,000 is restricted to the construction of a children’s library. Thus, net assets with donor restrictions is increased. Pledged receivables (an asset) also should be debited for $15,000, the amount to be paid in Year 3. The effect is to increase net assets with donor restrictions by $20,000.

11
Q

On May 1, Year 1, Carty Corp. properly classified as held for sale an asset group that qualified as a component of the entity. Furthermore, the transaction met the criteria for reporting the results of operations of the component in discontinued operations. The component’s operating loss was $100,000 for the period from May 1, Year 1, to the September 1, Year 1, disposal date, without regard to a $480,000 loss on disposal and a $300,000 writedown to fair value minus cost to sell of the assets to be sold. A $120,000 operating loss was incurred from January 1, Year 1, through April 30, Year 1. Before income taxes, what amount should be reported in Carty’s income statement for the year ended December 31, Year 1, as the loss from discontinued operations?

A

$1,000,000.

A component of an entity, e.g., an operating segment, reporting unit, subsidiary, or asset group, may be disposed of or classified as held for sale. In these circumstances, the component’s results of operations are reported in discontinued operations if the component has a major effect on an entity’s operations and financial results (e.g., major line of business, major geographical area, major equity method investment, or other major part of an entity). The income statement reports the component’s results of operations, including (1) any gain or loss from measuring the component at fair value minus cost to sell or (2) any gain or loss on disposal in discontinued operations in the period(s) when they occur. Consequently, the loss from discontinued operations for the year ended December 31, Year 1, includes all operating losses for Year 1, that is, the loss on disposal, the writedown to fair value minus cost to sell, the operating loss prior to May 1, and the other operating loss after the component was classified as held for sale. The loss on discontinued operations was therefore $1,000,000 ($480,000 + $300,000 + $120,000 + $100,000).

12
Q
The basic statements reported by a nongovernmental not-for-profit healthcare entity (NN) include
I. Statement of financial position.
II. Statement of cash flows.
III. Statement of operations.
IV. Statement of changes in equity.
A

I, II, & III only.

For a nongovernmental HCE, the basic statements include: (1) a statement of financial position, (2) a statement of operations, (3) a statement of changes in net assets, and (4) a statement of cash flows.

13
Q

Investments classified as held-to-maturity are measured at

A

Amortized cost, with no unrealized gains or losses reported.

Assuming the fair value option has not been elected, held-to-maturity securities are reported at amortized cost, with no unrealized gains or losses reported.

14
Q

A collection agency spent $50,000 in staff payroll costs investigating the feasibility of developing its own software program for tracking customer contacts. After committing to funding the project, software developers were paid $200,000 to write the code, and the company incurred $70,000 in general and administrative costs related to training and software maintenance. What amount should be capitalized?

A

$200,000.

For computer software to be used internally, costs incurred during the preliminary project stage (planning, evaluation) are expensed as incurred. However, costs incurred during the application development stage (coding, testing) are capitalized as computer software costs. They include external direct costs of materials and services, payroll costs directly associated with the project, and interest costs associated with the project. Thus, $200,000 of costs to write the code should be capitalized.

15
Q

When a loan receivable is impaired but foreclosure is not probable, which of the following may the creditor use to measure the impairment?
I. The loan’s observable market price.
II. The fair value of the collateral if the loan is collateral dependent.

A

Either I or II.

A creditor recognizes impairment of a loan when it is probable that the creditor will not be able to collect all amounts due in accordance with the terms of the loan. All amounts include both principal and interest payments. A creditor measures impairment based on the present value of expected future cash flows discounted at the loan’s effective rate. As a practical expedient, however, a creditor may use the loan’s observable market price or the fair value of the collateral if the value of the loan is collateral-dependent. If foreclosure is probable, impairment is based on the fair value of the collateral.

16
Q

In a business combination, the valuation of goodwill is a calculation

A

Of the residual paid above the fair value of the identifiable net assets.

According to ASC 350-20-20, goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. It is the excess of consideration transferred over the fair value of the net identifiable assets acquired.

17
Q

Which of the following is included in other comprehensive income?

A

Foreign currency translation adjustments.

Other comprehensive income (OCI) includes all items of comprehensive income not included in net income. Foreign currency translation adjustments for a foreign operation that is relatively self-contained and integrated within its environment do not affect cash flows of the reporting entity. Thus, they are excluded from earnings and reported in OCI.

18
Q

The summary of significant accounting policies should disclose the

A

Basis of profit recognition on long-term construction contracts.

Certain items are commonly required disclosures in a summary of significant accounting policies: (1) the basis of consolidation, (2) depreciation methods, (3) amortization of intangibles, (4) inventory pricing, (5) recognition of revenue from contracts with customers, and (6) recognition of revenue from franchising and leasing operations.

19
Q

Total governmental fund balances should be reconciled to the net position of governmental activities in the government-wide statements of net position. All of the following are components of this reconciliation except

A

Bonds payable in the current period.

The first step in preparing government-wide financial statements is to convert the data in the governmental fund financial statements. Because those data are presented using the modified accrual basis, adjustments are necessary to convert the data to the full accrual basis. The conversion is performed at the total governmental fund summary level, not at the individual fund level. Liabilities due in the current period are reported in the governmental fund financial statements. Thus, bonds payable in the current period is not a reconciling item.