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45 Cards in this Set

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A subsidiary, acquired for cash in a business combination, owned inventories with a market value different from the book value as of the date of combination. A consolidated balance sheet prepared immediately after the acquisition would include this difference as part of:
Inventories
The difference between (fair) market value and book value of inventories would be recognized by adjusting inventories to fair value on the consolidated balance sheet.
Not Goodwill or Retained Earnings.
For general purpose external financial reporting, discrete component unit information:
Is included in the government-wide statements only.
Discretely presented component units are presented in the Government-Wide Financial Statements only and not in the fund-level statements.
Which, if either, of the following statements concerning the transfer of investments between categories under IFRS No. 9 is/are correct?
I. Only investments in debt securities may be transferred between categories.

II. When investments are transferred between categories, financial statements of prior periods presented for comparative purposes must not be restated.
I only.
Statement I is correct; Statement II is not correct. Only investments in debt securities may be transferred between categories; equity securities may not be transferred between categories (Statement I). When investments are transferred between categories, financial statements of prior periods presented for comparative purposes must be restated (Statement II).
To elect to implement the Fair Value Option for an investment, do you wait till the end of the month, quarter, or year end?
You make the decision/election on the date you first recognize the investment. It is done right away.
Expenses for not-for-profit organizations fall into two broad categories:
(1) program services and
(2) supporting services. What is each used for?
Expenses for not-for-profit organizations fall into two broad categories:
(1) program services and
(2) supporting services. Expenses for PROGRAM SERVICES are incurred because of the stated mission of the not-for-profit. All other expenses fall under the SUPPORTING SERVICES classification. For example Management and General expenses should be reported as part of supporting services.
How are discontinued operations and extraordinary items that occur at midyear initially reported?
Included in net income and disclosed in the notes to interim financial statements.
Discontinued operations and extraordinary items are not related to any other interim period. Therefore, it would be erroneous to allocate their financial statement effects to more than one interim period.
Lion, Inc. owns 60% of Gray Corp.'s common stock. On December 31, 2005, Gray owes Lion $400,000 for a cash advance.
In preparing the consolidated balance sheet on that date, what amount of the advance should be eliminated?
$400,000
When consolidated statements are prepared, 100% of all reciprocal accounts are eliminated regardless of the ownership fraction. Thus, the whole $400,000 must be eliminated.
Instead of the usual cash dividend, Evie Corp. declared and distributed a property dividend from its overstocked merchandise.
The excess of the merchandise's carrying amount over its market value should be
Reported as a reduction in income before extraordinary items
When the carrying value and market value of an asset distributed as a property dividend are different, the resulting gain or loss on disposal is recognized as ordinary income, just as the gain or loss from disposal is recognized for any other reason.
Had the asset been sold first, and the cash proceeds distributed in lieu of the property dividend, the same gain or loss would have resulted. The disposal loss or gain is recognized in income from continuing operations.
All foreign exchange gains and losses on foreign currency TRANSACTIONS are counted as ordinary income or as a separate component of stockholders' equity?
Currency TRANSACTIONS are counted as ordinary income from continuing operations.
All foreign exchange gains and losses on foreign currency TRANSLATIONS are counted as ordinary income from continuing operations or as a separate component of stockholders' equity?
All foreign exchange gains and losses on foreign currency TRANSLATIONS are reported as a separate component of stockholders' equity, gains and losses on foreign currency transactions cannot be so reported. They must be counted as ordinary gains or losses from continuing operations.
GASB Concepts Statement No. 3 identifies the following five elements of the Statement of Financial Position:
(1) assets, (2) liabilities, (3) deferred inflows of resources, (4) deferred outflows of resources, and (5) net position. Since net assets are the difference between assets and liabilities, GASB prefers the term "net position," which is the difference between assets and deferred outflows and liabilities and deferred inflows. NET ASSETS IS NOT PART of the Statement of Financial Position.
Which of the following factors determines whether an identified segment of an enterprise should be reported in the enterprise's financial statements under SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information?
I. The segment's assets constitute more than 10% of the combined assets of all operating segments.

II. The segment's liabilities constitute more than 10% of the combined liabilities of all operating segments.
I only
FAS 131 uses assets, revenue, and profits as the factors identifying reportable segments. A segment meeting any one of the three quantitative factors constitutes a reportable segment. LIABILITIES ARE NOT one of the factors.
On December 1, 2004, Line Corp. received a donation of 2,000 shares of its $5 par value common stock from a stockholder. On that date, the stock's market value was $35 per share. The stock was originally issued for $25 per share.
By what amount would this donation cause total stockholders' equity to decrease?
$0
The shares are considered donated treasury shares. Treasury stock and a gain or revenue account are increased by the market value of the stock received in donation (FAS 116). The increase in the treasury stock account decreases the owners' equity, but the gain or revenue increases the owners' equity by the same amount. Therefore, there is no net effect on the owners' equity.
Blue Corp.'s December 31, 1991 balance sheet contained the following items in the long-term liabilities section:
9.75% registered debentures, callable in 2002, due in 2007 $700,000
9.5% collateral trust bonds, convertible into common stock beginning in 2000, due in 2010 600,000
10% subordinated debentures ($30,000 maturing annually beginning in 1997) 300,000
What is the total amount of Blue's term bonds?
$1,300,000
Both the registered debentures and collateral trust bonds are term bonds. A term bond matures on a single date. Although the bonds may be called or converted, these events may not occur, in which case they would be retired all on one date.
The subordinated debentures are serial bonds that mature in $30,000 amounts beginning 1997. They do not all mature on the same date.
On January 1, 2004, Point, Inc. purchased 10% of Iona Co.'s common stock. Point purchased additional shares bringing its ownership up to 40% of Iona's common stock outstanding on August 1, 2004. During October 2004, Iona declared and paid a cash dividend on all of its outstanding common stock. How much INCOME from the Iona investment should Point's 2004 Income Statement report? Think retroactive application.
10% of Iona's income for January 1 to July 31, 2004 plus 40% of Iona's income for August 1 to December 31, 2004.
The use of the equity method, under which the investor records its share of investee earnings, is RETROACTIVELY applied once the required percentage of ownership is reached.
To obtain significant influence, the investor must hold 20% or be able to show it has significant influence. Thus, Point could not use the equity method until August 1, but the use of the equity method then is RETROACTIVELY applied to earlier periods during which Point owned the same stock, but it is not applied enough to qualify for the equity method. Therefore, 10% of the investee's earnings from January 1 to July 31 is recognized in Point's income.
May Co. and Sty Co. exchanged nonmonetary assets. The exchange did not culminate an earning process for either May or Sty (the exchange lacked commercial substance). May paid cash to Sty in connection with the exchange. The book value of the asset exchanged exceeded its fair value for both firms. Therefore, a LOSS on the exchange should be recognized by
Both May & Sty recognize a LOSS. The fair value of each asset is less than book value implying that both firms have a loss. LOSSES are recognized in full regardless of whether there is commercial exchange.
A debtor and a creditor have negotiated new terms on a note. How can you determine whether the restructuring is a troubled debt restructure?
If the present value of the restructured flows using the original interest rate is less than the BOOK VALUE of the debt at the date of the restructure. This is one of the ways to determine if a restructuring is troubled. Under the terms of this answer, the creditor is receiving a stream of cash flows with a present value less than what is currently owed and is making a concession. Not MARKET VALUE/FAIR VALUE.
Which of the following activities would most likely be accounted for in a proprietary fund?
Wastewater and sewerage services. Wastewater and sewerage services are usually provided on a service-fee basis; therefore, they are accounted for in an enterprise fund - one of the two types of proprietary funds. Enterprise funds are also referred to as "business type" funds and use full accrual accounting.
State and local governments use three broad categories of funds: GOVERNMENTAL FUNDS, PROPRIETARY FUNDS and FIDUCIARY FUNDS.
Governmental funds include the following. GENERAL FUND. This fund is used to account for general operations and activities not requiring the use of other funds. SPECIAL REVENUE FUNDS are required to account for the use of revenue EARMARKED BY LAW for a particular purpose. State and federal fuel tax revenues require special revenue funds, because federal and state laws restrict these taxes to transportation uses. CAPTIAL PROJECTS FUNDS are used to account for the construction or acquisition of fixed assets, such as buildings, equipment and roads. Depending on its use, a fixed asset may instead be financed by a special revenue fund or a proprietary fund. A CAPITAL PROJECT FUND exists only until completion of the project. Fixed assets acquired and long-term debts incurred by a capital project are assigned to the government's General Fixed Assets and Long-Term Debts.
Debt service funds are used to account for money that will be used to pay the interest and principal of long-term debts. Bonds used by a governme
A firm has nonconvertible cumulative preferred stock outstanding all year. The firm also reports all eight required per share amounts because both discontinued operations and extraordinary items are reported. The computation for how many of the eight EPS amounts reflects a subtraction for preferred dividends?
Four: The four amounts that are reported on a per share basis for both basic and diluted EPS (8 in total) are income from continuing operations, discontinued operations, extraordinary items, and net income. Only the first and last are income items, and only these are reduced by preferred dividends. Thus, in total, four amounts are affected for basic and diluted EPS. Income available to common shares is the numerator of EPS - preferred dividends must be subtracted from both income from continuing operations and net income. Discontinued operations and extraordinary items ARE COMPONESTS OF INCOME, not income amounts themselves, and thus need no reduction for preferred dividends.
What are the componets of EPS?
Basic and Diluted: One each for the following as Basic and Diluted: Income From Continuing Operations, Discountinued Operations, Extraordinary Items, and Net Income.
Discounting a note payable to the bank. How much money are you going to get?
First figure out the maturity amount of the note. Face Value times 1.rate (500 X 1.08). Second take the maturity amount times the discount rate times the fraction of month left for the note. Third, subtract the amount from the maturity and the difference is what is what you will get.
When goodwill is recognized in a business combination, which of the following types of information about that goodwill must be disclosed?
I. A quantitative description of the factors that make up the goodwill.

II. The amount of goodwill that is expected to be deductible for tax purposes.

III. The amount of goodwill allocated to each reportable segment.
Choose the best description of accretion expense associated with an asset retirement obligation.
Growth in asset retirement obligation. Accretion expense is simply the increase in the asset retirement obligation over time. The asset retirement obligation is initially recorded at present value or fair value and, over time, grows with interest until it reaches its future value - the amount due. Accretion expense is similar to the interest cost component of pension expense - the growth in projected benefit obligation. It is caused by the fact that the asset retirement obligation is recorded at present value but not paid until later.
The rent that you straight line is what? The grand total or the net total after all the reductions from free rent months, reductions in rent and other?
the net total after all the reductions, discounts, free rent months are subtracted from the overall total. In the absence of information to the contrary, the lessee is assumed to receive the same benefit from the asset each period. Therefore, rent expense for an operating lease is recognized evenly over the lease term, regardless of the pattern of payments.
Which one of the following would constitute a highly inflationary economy when determining the functional currency of a foreign entity?
35% inflation for each of the past 3 years.
For determining a functional currency, a highly inflationary (hyperinflationary) economy is one that has experienced a cumulative inflation of 100% or more over the past 3 years. Inflation of 35% per year over the past three years is a cumulative 105% and constitutes a highly inflationary economy.
Which of the following would not be considered a financial asset?
Inventory is not a financial asset. Financial assets consist of cash (including claims to cash), evidence of ownership interest in an entity (e.g., investments and ownership of interest in a partnership), and certain contracts, but not inventory.
The retained earnings balance in an adjusted trial balance does not reflect earnings for the year. Retained earnings are not adjusted for net income until the accounts are closed, which occurs after the trial balance is prepared. Therefore, the retained earnings accounts listed in the trial balance do not reflect current earnings.

Retained earnings per trial balance ($900,000 + $160,000) $1.06mn
Plus earnings, less costs and expenses $6.68mn - $5.18mn - $450,000 (tax) 1.05mn
Total ending retained earnings $2,110,000
The trial balance does not reflect the income tax expense. This amount was listed as prepaid taxes, but must be reclassified to income tax expense. When firms make estimated tax payments, the debit should be to income tax expense. Income tax has not been recorded. The estimated payments approximately cover the tax liability for the year that has ended. Therefore, the taxes cannot be said to be prepaid.
Goodwill should be tested for value impairment at which of the following levels?
A. Each identifiable long-term asset.
B. Each reporting unit
C. Each acquisition unit
D. The entire business as a whole
A. Each identifiable long-term asset. Goodwill impairment is not at the individual asset level.
B. EACH REPORTING UNIT
Goodwill is included in an asset group when the group is a reporting unit. A reporting unit is an operating segment or one level below.
C. Each acquisition unit
D. The entire business as a whole
Which, if either, of the following statements concerning the transfer of investments between categories under IFRS No. 9 is/are correct?
I. Only investments in debt securities may be transferred between categories.

II. When investments are transferred between categories, financial statements of prior periods presented for comparative purposes must not be restated.
Statement I is correct; Statement II is not correct. Only investments in debt securities may be transferred between categories; EQUITY SECURITIES may NOT be transferred between categories (Statement I). Just DEBIT SECURITIES may be transferred. Also, when investments are transferred between categories, financial statements of PRIOR PERIODS presented for comparative purposes must be RESTATED (Statement II).
The specific method to be used to convert financial statements of a subsidiary expressed in a foreign currency into the domestic currency of the parent depends primarily on:
A. The reporting currency of the subsidiary.
B. The reporting currency of the parent.
C. The functional currency of the subsidiary.
D. The functional currency of the parent.
A. The reporting currency of the subsidiary.
B. The reporting currency of the parent.
The method to be used to convert financial statements of a subsidiary from a foreign currency to the parent's currency does not depend primarily on the reporting currency of the parent, but rather on the functional currency of the subsidiary. Whether the functional currency of the subsidiary is the local foreign currency, the parent's currency, or another foreign currency will determine the conversion method or methods to be used.
C. THE FUNCTIONAL CURRENCY OF THE SUBSIDIARY.
The method to be used to convert financial statements of a subsidiary from a foreign currency to the parent's currency depends primarily on the functional currency of the subsidiary. Whether the functional currency of the subsidiary is the local foreign currency, the parent's currency, or another foreign currency will determine the conversion method or methods to be used.
D. The functional currency of the parent.
Which of the following is least likely to be investment property under IFRS?
A. A vacant building listed with a broker as available for lease under an operating lease.
B. A plot of vacant land held for long-term capital appreciation.
C. A building under construction that is to be leased upon completion to another entity under an operating lease.
A building under construction to be leased to another entity under an operating lease, upon completion of construction, would qualify as investment property during construction.
CORRECT D. A plot of vacant land that is for sale by a land developer. A plot of vacant land that is for sale by a land developer would not qualify as investment property. The vacant land would constitute INVENTORY to a land developer and, since it is not being held for capital appreciation, would not qualify as investment property.
Which of the following statements, if any, concerning the accounting for business combinations is/are correct?

I. All business combinations in the U.S. are subject to the acquisition accounting requirements of FASB #141R, "Business Combinations."

II. The acquisition accounting requirements of FASB #141R, "Business Combinations," are identical to those of IFRS #3, "Business Combinations."
Neither I nor II.
Neither statement is correct. No business combinations in the U.S. are subject to the acquisition accounting requirements of FASB #141R (Statement I). That pronouncement specifically excludes certain combinations, including the formation of a joint venture, the acquisition of assets that do not constitute a business, a combination between entities under common control, a combination between not-for-profit organizations, and the acquisition of a for-profit entity by a not-for-profit organization. In addition, the requirements of FASB #141R are not identical to those of IFRS #3 (Statement II). Differences exist between the two pronouncements in the areas of scope; the definition of control; how fair value, contingencies, employee benefit obligations, noncontrolling interest, and goodwill are measured; and disclosure requirements.
Dee's inventory and accounts payable balances at December 31, 2005, increased over their December 31, 2004, balances.
Should these increases be added to or deducted from cash payments to suppliers to arrive at 2005 cost of goods sold?
Increase in Inventory Deducted from Cost of Goods. Increase In AP Added to Cost of Goods.
Payments to suppliers = cost of goods sold + inventory increase - AP increase.

In the above equation, the inventory increase is added to cost of goods sold because (1) it is not included in cost of goods sold because it is the part of inventory purchased that was not sold in the period, and (2) it is included in purchases.

The accounts payable increase is subtracted because it represents an increase in inventory and, therefore, the cost of goods sold that was not paid for in the current period.

The question asks for the effects on the equation written differently:

Payments to suppliers - inventory increase + AP increase = cost of goods sold.

Therefore, the inventory increase is subtracted from payments to suppliers, and the AP increase is added, in deriving the cost of goods sold.
For business combinations, which one of the following statements correctly reflects the determination of the accounts and amounts for the entry to record the combination?
LEGAL FORM determines the entry accounts; ACCOUNTING METHOD determines entry amounts. The LEGAL FORM of a business combination determines the ENTRY ACCOUNTS (i.e., which accounts to debit and/or credit), and the ACCOUNTING METHOD (acquisition method) determines the amounts at which the entries will be made (i.e., fair value).
Currency Conversions:
Wholly owned subsidiary.
Functional currency is REPORTING. Conversion is Remeasurement.
Currency Conversions:
80% owned subsidiary in Germany. The subsidiary's operations are relatively self-contained and integrated within Germany.
Functional currency is RECORDING
Conversion is Translation.
In determining the fair value of an asset in the most advantageous market, the market based exit price should be adjusted for
In determining the fair value of an asset in the most advantageous market, the market based EXIT PRICE would NOT be adjusted for TRANSACTION COST associated with executing the (hypothetical) transaction, but WOULD BE ADJUSTED for TRANSPORTATION COST to get the asset to the principal or most advantageous market.
Currently, there are four possible items of other comprehensive income:
1. minimum additional pension liability adjustment,

2. unrealized gains and losses on investments classified as available-for-sale (and certain other related unrealized gains/losses),

3. gains and losses resulting from translating financial statements expressed in a foreign currency (foreign currency translation) and losses/gains on related hedges,

4. and gains and losses on the effective portion of cash flow hedges.
Which of the following statements concerning converting financial statements from a foreign currency to a reporting currency is/are correct?

I. Converting from the functional currency to the reporting currency is called "translation."

II. Converting from the recording currency to the functional currency is called "remeasurement."
Both Statement I and Statement II are correct. Converting from the functional currency to the reporting currency is called "translation" (Statement I), and converting from the recording currency to the functional currency is called "remeasurement" (Statement II). Which method of conversion is appropriate will depend on the functional currency of the entity for which financial statements are to be converted.
The funded ratio of a pension plan compares:
The actuarial value of plan assets to the actuarial accrued pension liability.
The funded ratio compares the actuarial value of plan assets to the actuarial accrued pension liability.
What would cause a decrease in accumulated depreciation?
A decrease in accumulated depreciation will occur when an asset is sold, scrapped, or retired. At that point, the asset’s accumulated depreciation and its cost are removed from the accounts. (The net of these two amounts—known as the book value or carrying value—is then compared to the proceeds to determine if there is a gain or loss on the disposal.)

Some accounting textbooks state that the cost of an expenditure that extends the useful life of an asset should be debited to the accumulated depreciation account instead of the asset account. Such an entry will also reduce the credit balance in the accumulated depreciation account.
Reporting accounts receivable at net realizable value is a departure from the accounting principle of:
Not Conservatism.
Reporting accounts receivable at net realizable value is not a departure from the principle of conservatism. In fact, it is just that principle that requires reporting accounts receivable at net realizable value.
Not Fair value.
Not Market value.
Correct Answer: HISTORICAL COST. Reporting accounts receivable at net realizable value is a departure from the principle of historical cost. Accounts receivable is usually aged by some method and reported at net realizable value.
Calculating Retained Earnings in the Adjusted Trial Balance.
The retained earnings balance in an adjusted trial balance does not reflect earnings for the year. Retained earnings are not adjusted for net income until the accounts are closed, which occurs after the trial balance is prepared. Therefore, the retained earnings accounts listed in the trial balance do not reflect current earnings.

Retained earnings per trial balance ($900,000 + $160,000) $1.06mn
Plus earnings, less costs and expenses $6.68mn - $5.18mn - $450,000 (tax) 1.05mn
Total ending retained earnings $2,110,000
The trial balance does not reflect the income tax expense. This amount was listed as prepaid taxes, but must be reclassified to income tax expense. When firms make estimated tax payments, the debit should be to income tax expense. Income tax has not been recorded. The estimated payments approximately cover the tax liability for the year that has ended. Therefore, the taxes cannot be said to be prepaid.
The SEC is comprised of five commissioners, appointed by the President of the United States, and four divisions. Which of the following divisions is responsible for overseeing compliance with the securities acts?
A. Division of Corporate Finance.
B. Division of Enforcement.
C. Division of Trading and Markets.
D. Division of investment management.
A. Division of Corporate Finance.
The Division of Corporate Finance oversees the compliance with the securities acts and examines all filings made by publicly held companies.
B. Division of Enforcement.
The Division of Enforcement completes the investigation and takes appropriate actions when there is a violation of a securities law (except the Public Utility Holding Company Act). This division makes recommendations to the Justice Department concerning any punishments or potential criminal prosecution.
C. Division of Trading and Markets.
D. Division of investment management.