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The financial statements of the reporting entity of a state or local governmental unit include information about which of the following? I. The primary government II. Discretely presented component units III. Blended component units A. I only. B. I and III only. C. I, II, and III. D. I and II only.
Answer (C) is   correct. The financial statements of the reporting entity should provide an overview of the entity but should distinguish between the primary government and its component units. Thus, the statements should communicate information about the component units and their relationships with the primary government rather than suggest that these organizations constitute one legal entity. For this purpose, the government-wide financial statements should report information about discretely presented component units in separate rows and columns. Most component units should be included in the reporting entity in this way. Fiduciary component units are reported only in the primary government’s fiduciary fund statements. However, the other fund statements report information only for blended (not discretely presented) component units. Discrete presentation also includes reporting of major component unit information in the basic statements. Furthermore, some component units are, in substance, the same as the primary government and should be reported as a part thereof. Blending is appropriate only if the component unit’s governing body is substantially the same as the primary government’s, or the component unit exclusively or almost exclusively benefits the primary government. Blended component-unit balances and transactions are reported in a manner similar to the balances and transactions of the primary government. Thus, blended component units are reported as part of the primary government in the fund financial statements and the government-wide financial statements.
Dunn and Grey are partners with capital account balances of $60,000 and $90,000, respectively. They agree to admit Zorn as a partner with a one-third interest in capital and profits, for an investment of $100,000, after revaluing the assets of Dunn and Grey. Goodwill to the original partners should be A. $33,333 B. $66,667 C. $50,000 D. $0
Answer (C) is   correct. If a one-third interest is worth an investment of $100,000, the fair value of the partnership must be $300,000 ($100,000 ÷ 33 1/3%). The total of the existing capital balances and Zorn’s investment is $250,000 ($60,000 + $90,000 + $100,000). Thus, goodwill is $50,000 ($300,000 – $250,000). The entry will be to debit cash (or property at fair value) for $100,000 and goodwill for $50,000, and to credit Zorn’s capital balance for $100,000 and the capital balances of Dunn and Grey for a total of $50,000.
For the fall semester of the current year, Ames University assessed its students $3 million for tuition and fees. The net amount realized was only $2.5 million because scholarships of $400,000 were granted to students and tuition remissions of $100,000 were allowed to faculty members’ children attending Ames. These amounts were properly classified as expenses. What amount should Ames report for the period as revenues for tuition and fees? A. $3,000,000 B. $2,500,000 C. $2,900,000 D. $2,600,000
Answer (A) is   correct. Revenues from exchange transactions are normally recorded at gross amounts. Thus, in accounting for tuition and fees for colleges and universities, the full amount of the tuition assessed is usually reported as revenue. Tuition waivers, scholarships, and like items are recorded as expenses if given in exchange transactions, for example, as part of a compensation package. However, when the institution regularly provides discounts to certain students, revenues are recognized net of the discounts. Accordingly, given that scholarships and tuition remissions were expenses, revenues should be reported at their gross amount of $3,000,000.
In Year 3, a not-for-profit trade association enrolled five new member companies, each of which was obligated to pay nonrefundable initiation fees of $1,000. These fees were receivable by the association in Year 4. Three of the new members paid the initiation fees in Year 3, and the other two new members paid their initiation fees in Year 4. Annual dues (excluding initiation fees) received by the association from all of its members have always covered the organization’s costs of services provided to its members. It can be reasonably expected that future dues will cover all costs of the organization’s future services to members. Average membership duration is 10 years because of mergers, attrition, and economic factors. What amount of initiation fees from these five new members should the association recognize as revenue in Year 4? A. $5,000 B. $0 C. $500 D. $3,000
Answer (A) is   correct. Membership dues received or receivable in exchange transactions that relate to several accounting periods should be allocated and recognized as revenue in those periods. Nonrefundable initiation and life membership fees are recognized as revenue when they are receivable if future dues and fees can be reasonably expected to cover the costs of the organization’s services. Otherwise, they are amortized to future periods. Hence, given that future dues are expected to cover the organization’s costs, the $5,000 in nonrefundable initiation fees should be recognized as revenue when assessed and reported as such in the Year 4 statement of activities.
Elm City issued a purchase order for supplies with an estimated cost of $5,000. When the supplies were received, the accompanying invoice indicated an actual price of $4,950. What amount should Elm debit (credit) to the reserve for encumbrances after the supplies and invoice were received? A. $50 B. $5,000 C. $(50) D. $4,950
Answer (B) is   correct. Expenditures are actual decreases in net financial resources. They are recognized in the governmental funds when fund liabilities are incurred, if measurable. When supplies are received by or services are rendered to a governmental unit, a journal entry is made to debit the expenditures control and to credit vouchers payable. In addition, a previously recorded encumbrance must be reversed by debiting reserve for encumbrances (a fund balance account) and crediting encumbrances control. Because the original budgetary entry is reversed, reserve for encumbrances must be debited for the estimated cost of $5,000
For a bond issue that sells for less than its par value, the market rate of interest is A. Less than the rate stated on the bond. B. Dependent on the rate stated on the bond. C. Higher than the rate stated on the bond. D. Equal to the rate stated on the bond
Answer (C) is   correct. When a bond is issued for less than its par (face) value, the rate of interest demanded by the market is higher than the rate stated on the bond.
For interim financial reporting, which of the following may be accrued or deferred to provide an appropriate cost in each period?      Interest    Rent A.     No         Yes B.     Yes        No C.      Yes       Yes D.      No       No
Answer (C) is   correct. APB Opinion 28 states that interest and rent may be accrued or deferred at the annual reporting date to achieve a full year’s charge to costs and expenses. “Similar procedures should be adopted at each interim reporting date to provide an appropriate cost in each period.”
On January 1, Year 1, Warren Co. purchased a $600,000 machine, with a 5-year useful life and no salvage value. The machine was depreciated by an accelerated method for book and tax purposes. The machine’s carrying amount was $240,000 on December 31, Year 2. On January 1, Year 3, Warren changed to the straight-line method for financial statement purposes only. Warren had planned the change in accordance with a consistently applied policy. Warren’s income tax rate is 30%. In its Year 3 financial statements, what amount should Warren report as the cumulative effect of this change on the beginning balance of retained earnings if it issues single-period statements only? A. $120,000 B. $36,000 C. $84,000 D. $0
Answer (D) is   correct. A change in depreciation method ordinarily is treated as a change in principle inseparable from a change in an estimate. Such a change is applied prospectively. Thus, adjustments to the beginning balances of the first period presented are not made. Moreover, no change in principle is deemed to have occurred because the change was planned as part of a consistently applied policy at a specific time in the asset’s service life. For example, this change might have been planned at the time the entity adopted the modified accelerated cost recovery system. Accordingly, the adjustment to the beginning balance of retained earnings for the first period presented (Year 3 for single-period statements) is $0.
An activity that provides goods to other subunits of the primary government on a cost-reimbursement basis should be reported as a(n) A. Fiduciary fund. B. Agency fund. C. Enterprise fund in some cases. D. Internal service fund in all cases.  
Answer (C) is   correct. Internal service funds may be used for activities that provide goods and services to other subunits of the primary government and its component units or to other governments on a cost-reimbursement basis. However, if the reporting government is not the predominant participant, the activity should be reported as an enterprise fund.
When a consolidated entity undertakes a quasi-reorganization, A. All consolidated retained earnings should be eliminated if any part of a loss is to be debited to paid-in capital. B. Only the parent-only balance sheet is affected. C. All losses should be written off against paid-in capital prior to debiting retained earnings. D. Paid-in capital cannot arise as a result.
Answer (A) is   correct. Consistent with the treatment of an unconsolidated entity, all consolidated retained earnings should be eliminated in a quasi-reorganization of a consolidated entity by a debit to paid-in capital.
Rand, Inc. accepted from a customer a $40,000, 90-day, 12% interest-bearing note dated August 31. On September 30, Rand discounted the note at the Apex State Bank at 15%. However, the proceeds were not received until October 1. In Rand’s September 30 balance sheet, the amount receivable from the bank, based on a 360-day year, includes accrued interest revenue of A. $300 B. $462 C. $376 D. $170  
Answer (D) is   correct. As determined below, the interest received by Rand if it had held the 90-day note to maturity would have been $1,200. The discount fee charged on a note with a maturity amount of $41,200 ($40,000 face amount + $1,200 interest) discounted at 15% for 60 days is $1,030. The difference of $170 ($1,200 interest – $1,030 discount fee) should be reflected as accrued interest revenue at the balance sheet date because the cash proceeds were not received until the next period. $40,000 × 12% × (90 ÷ 360) = $1,200 interest $41,200 × 15% × (60 ÷ 360) = (1,030) discount fee Accrued interest revenue $ 170
Long Co. had 100,000 shares of common stock issued and outstanding at January 1. During the year, Long took the following actions: March 15 -- declared a 2-for-1 stock split, when the fair value of the stock was $80 per share December 15 -- declared a $.50 per share cash dividend In Long’s statement of changes in equity for the year, what amount should Long report as dividends? A. $950,000 B. $850,000 C. $100,000 D. $50,000
Answer (C) is   correct. The 100,000 shares of common stock split 2-for-1, leaving 200,000 shares at year-end. The dividends declared equaled $100,000 (200,000 shares × $0.50).
On January 15, Year 5, Rico Co. declared its annual cash dividend on common stock for the year ended January 31, Year 5. The dividend was paid on February 9, Year 5, to shareholders of record as of January 28, Year 5. On what date should Rico decrease retained earnings by the amount of the dividend? A. January 31, Year 5. B. February 9, Year 5. C. January 28, Year 5. D. January 15, Year 5.
Answer (D) is   correct. Unlike stock dividends, cash dividends cannot be rescinded. A liability to the shareholders is created because the dividends must be paid once they are declared. At the declaration date, retained earnings must be debited, resulting in a decrease. Retained earnings $XXX Dividends payable $XXX The declaration date was January 15.
On September 22, Year 2, Yumi Corp. purchased merchandise from an unaffiliated foreign company for 10,000 units of the foreign company’s local currency. On that date, the spot rate was $.55. Yumi paid the bill in full on March 20, Year 3, when the spot rate was $.65. The spot rate was $.70 on December 31, Year 2. What amount should Yumi report as a foreign currency transaction loss in its income statement for the year ended December 31, Year 2? A. $500 B. $1,000 C. $0 D. $1,500
Answer (D) is   correct. SFAS 52, Foreign Currency Translation, requires that a receivable or payable denominated in a foreign currency be adjusted to its current exchange rate at each balance sheet date. The resulting gain or loss should ordinarily be included in determining net income. It is the difference between the spot rate on the date the transaction originates and the spot rate at year-end. Thus, the Year 2 transaction loss for Yumi Corp. is $1,500 [($0.55 – $0.70) × 10,000 units].
On July 1, one of Rudd Co.’s delivery vans was destroyed in an accident. On that date, the van’s carrying value was $2,500. On July 15, Rudd received and recorded a $700 invoice for a new engine installed in the van in May and another $500 invoice for various repairs. In August, Rudd received $3,500 under its insurance policy on the van, which it plans to use to replace the van. What amount should Rudd report as gain (loss) on disposal of the van in its income statement for the year? A. $300 B. $1,000 C. $(200) D. $0
Answer (A) is   correct. Gain (loss) is recognized on an involuntary conversion equal to the difference between the proceeds and the carrying amount. The carrying amount includes the carrying value at July 1 ($2,500) plus the capitalizable cost ($700) of the engine installed in May. This cost increased the carrying amount because it improved the future service potential of the asset. Ordinary repairs, however, are expensed. Consequently, the gain is $300 [$3,500 – ($2,500 + $700)].
Which fiduciary fund type may be expendable or nonexpendable? A. General fund. B. Special revenue fund. C. Permanent fund. D. Private-purpose trust fund.
Answer (D) is   correct. Under GASBS 34, a private-purpose trust fund may be used for any trust arrangement, other than one reported in a pension (or other employee benefit) trust fund or in an investment trust fund, in which the governmental entity serves as a fiduciary for individuals, private organizations, or other governments. A private-purpose trust fund may be expendable; that is, the principal may be expended to achieve the trust’s purposes. It may also be nonexpendable; that is, earnings only, not principal, may be expended to achieve the trust’s purposes. Prior to the issuance of GASBS 34, publicpurpose and private-purpose trust funds were both classifiable in the expendable trust fund type or in the nonexpendable trust fund type. Under GASBS 34, public-purpose expendable trust funds and public-purpose nonexpendable trust funds are classified as special revenue funds and permanent funds, respectively.
In its financial statements, Hila Co. discloses supplemental information on the effects of changing prices in accordance with SFAS 89, Financial Reporting and Changing Prices. Hila computed the increase in current cost of inventory as follows: Increase in current cost (nominal dollars) $15,000 Increase in current cost (constant dollars) $12,000 What amount should Hila disclose as the inflation component of the increase in current cost of inventories? A. $15,000 B. $3,000 C. $12,000 D. $27,000
Answer (B) is   correct. If supplemental information on the effects of changing prices is presented in accordance with SFAS 89, the change in current cost amounts of inventory and property, plant, and equipment is reported both before and after eliminating the effects of general inflation. The inflation component of the increase in current cost (the change attributable to general price-level changes) is the difference between the nominal dollar and constant dollar measures, or $3,000 ($15,000 – $12,000).
Able sold its headquarters building at a gain and simultaneously leased back the building. The lease was reported as a capital lease. At the time of sale, the gain should be reported as A. Operating income. B. An asset valuation allowance. C. An extraordinary item, net of income tax. D. A separate component of equity.
Answer (B) is   correct. In a sale-leaseback transaction, if the lease qualifies as a capital lease, the gain on the sale is normally deferred and amortized by the seller-lessee in proportion to the amortization of the leased asset, that is, at the same rate at which the leased asset is depreciated. Thus, the deferred gain may be reported as an asset valuation allowance (a contra asset with a credit balance).
Grim Corporation operates a plant in a foreign country. It is probable that the plant will be expropriated. However, the foreign government has indicated that Grim will receive a definite amount of compensation for the plant. The amount of compensation is less than the fair market value but exceeds the carrying amount of the plant. The contingency should be reported in A. A fixed asset valuation allowance account. B. The notes to the financial statements. C. The income statement. D. An equity valuation allowance account.  
Answer (B) is   correct. SFAS 5 provides for recognition of loss but not gain contingencies if certain criteria are met. A loss contingency is an existing condition, situation, or set of circumstances involving uncertainty as to either the impairment of an asset’s value or the incurrence of a liability at a balance sheet date. Resolution of the uncertainty depends on the occurrence or nonoccurrence of one or more future events. In the Grim Corporation case, an economic loss is expected because the amount of compensation is less than the fair market value of the plant expropriated. However, the amount of compensation exceeds the carrying amount of the plant. Thus, no accounting loss will result. The contingency should therefore be reported only in the notes to the financial statements.
During the current year, Young and Zinc maintained average capital balances in their partnership of $160,000 and $100,000, respectively. The partners receive 10% interest on average capital balances, and residual profit or loss is divided equally. Partnership profit before interest was $4,000. By what amount should Zinc’s capital balance change for the year? A. $2,000 increase. B. $11,000 decrease. C. $12,000 increase. D. $1,000 decrease.
Answer (D) is   correct. The partners are to receive 10% interest and then split the residual profit or loss. Because interest exceeds partnership profit before interest, the residual loss is $22,000 {[($160,000 + $100,000) × 10%] – $4,000}. Zinc’s capital balance is increased by $10,000 ($100,000 × 10%) and decreased by $11,000 ($22,000 loss × 50%), a net decrease of $1,000.
In accordance with generally accepted accounting principles, which of the following methods of amortization is required for amortizable intangible assets if the pattern of consumption of economic benefits is not reliably determinable? A. Units-of-production. B. Double-declining-balance. C. Sum-of-the-years’-digits. D. Straight-line
Answer (D) is   correct. The default method of amortization of intangible assets is the straight-line method (SFAS 142).
On January 1, Year 1, Jambon purchased equipment for use in developing a new product. Jambon uses the straight-line depreciation method. The equipment could provide benefits over a 10-year period. However, the new product development is expected to take 5 years, and the equipment can be used only for this project. Jambon’s Year 1 expense equals A. One-fifth of the cost of the equipment. B. The total cost of the equipment. C. One-tenth of the cost of the equipment. D. Zero.
Answer (B) is   correct. The costs of materials, equipment, or facilities that are acquired or constructed for a particular R&D project and that have no alternative future uses and therefore no separate economic values are R&D costs when incurred. R&D costs are expensed in full when incurred.
Verona Co. had $500,000 in short-term liabilities at the end of the current year. Verona issued $400,000 of common stock subsequent to the end of the year, but before the financial statements were issued. The proceeds from the stock issue were intended to be used to pay the short-term debt. What amount should Verona report as a short-term liability on its balance sheet at the end of the current year? A. $500,000 B. $400,000 C. $0 D. $100,000
Answer (D) is   correct. The portion of debt scheduled to mature in the following fiscal year ordinarily should be classified as a current liability. However, if an entity intends to refinance short-term obligations on a long-term basis and demonstrates an ability to consummate the refinancing, the obligation should be excluded from current liabilities and classified as noncurrent. One method of demonstrating the ability to refinance is to issue long-term obligations or equity securities after the balance sheet date but before the financial statements are issued (SFAS 6). Verona demonstrated an ability to refinance $400,000 of the short-term liabilities by issuing common stock. Hence, it should report a short-term liability of $100,000 ($500,000 – $400,000).
On February 1, Tory began a service proprietorship with an initial cash investment of $2,000. The proprietorship provided $5,000 of services in February and received full payment in March. The proprietorship incurred expenses of $3,000 in February, which were paid in April. During March, Tory drew $1,000 against the capital account. In the proprietorship’s financial statements for the 2 months ended March 31, prepared under the cash-basis method of accounting, what amount should be reported as capital? A. $7,000 B. $3,000 C. $1,000 D. $6,000
Answer (D) is   correct. Under the cash basis, the capital on March 31 is $6,000 ($2,000 beginning capital + $5,000 payment received in March – $1,000 withdrawal).
Rye Co. purchased a machine with a four-year estimated useful life and an estimated 10% salvage value for $80,000 on January 1, Year 6. In its income statement, what should Rye report as the depreciation expense for Year 8 using the doubledeclining- balance (DDB) method? A. $18,000 B. $9,000 C. $20,000 D. $10,000
Answer (D) is   correct. Under the DDB method, a constant rate is applied to a declining carrying amount of an asset. Salvage value is ignored except that the asset is not depreciated below salvage value. The constant rate for the DDB method is twice the straight-line rate [(100% ÷ 4   years) × 2 = 50%]. Year 6: $80,000 × .50 = $40,000   depreciation expense
Year 7: $40,000 × .50 = $20,000   depreciation expense
Year 8: $20,000 × .50 = $10,000   depreciation expense
On March 15, Year 1, Kathleen Corp. adopted a plan to accumulate $1,000,000 by September 1, Year 5. Kathleen plans to make four equal annual deposits to a fund that will earn interest at 10% compounded annually. Kathleen made the first deposit on September 1, Year 1. Future value and future amount factors are as follows: Future value of $1 at 10% for four periods 1.46 Future amount of ordinary annuity of $1 at 10% for four periods 4.64 Future amount of annuity in advance of $1 at 10% for four periods 5.11 Kathleen should make four annual deposits (rounded) of A. $250,000 B. $195,700 C. $684,930 D. $215,500
Answer (B) is   correct. The depositor wishes to have $1,000,000 at the end of a 4-year period (from 9/1/Year 1 to 9/1/Year 5). The amount will be generated from four equal annual payments (an annuity) to be made starting at the beginning of the 4-year period. The annual payment for this annuity can be calculated in advance by dividing the desired future amount of $1,000,000 by the factor for the future amount of an annuity in advance of $1 at 10% for four periods. Each annual deposit should therefore equal $195,700 ($1,000,000 ÷ 5.11).
Rein, Inc. reported deferred tax assets and deferred tax liabilities at the end of both Year 3 and Year 4. According to SFAS 109, for the year ended in Year 4, Rein should report deferred income tax expense or benefit equal to the A. Amount of the income tax liability plus the sum of the net changes in deferred tax assets and deferred tax liabilities. B. Decrease in the deferred tax assets. C. Increase in the deferred tax liabilities. D. Sum of the net changes in deferred tax assets and deferred tax liabilities.
Answer (D) is   correct. The deferred tax expense or benefit recognized is the sum of the net changes in the deferred tax assets and deferred tax liabilities. The deferred income tax expense or benefit is aggregated with the income taxes currently payable or refundable to determine the amount of income tax expense or benefit for the year to be recorded in the income statement.
In the government-wide statement of net assets, restricted capital assets should be included in the A. Nonexpendable component of restricted net assets. B. Expendable component of restricted net assets. C. Designated component of net assets. D. Invested in capital assets, net of related debt, component of net assets.
Answer (D) is   correct. Invested in capital assets, net of related debt, includes unrestricted and restricted capital assets, net of accumulated depreciation and related liabilities for borrowings. However, debt related to significant unspent proceeds is classified in the same net assets component as those proceeds.
The following information pertained to Azur Co. for the year: Purchases $102,800 Purchase discounts 10,280 Freight-in 15,420 Freight-out 5,140 Beginning inventory 30,840 Ending inventory 20,560 What amount should Azur report as cost of goods sold for the year? A. $123,360 B. $118,220 C. $102,800 D. $128,500
Answer (B) is   correct. Cost of goods sold equals beginning inventory, plus net purchases, plus freight-in, minus ending inventory. Freight-out is a cost of selling the goods rather than a cost of acquiring the goods. Thus, cost of goods sold is $118,220 [$30,840 + ($102,800 – $10,280) + $15,420 – $20,560].
Kent Co., a division of National Realty, Inc., maintains escrow accounts and pays real estate taxes for National’s mortgage customers. Escrow funds are kept in interest-bearing accounts. Interest, minus a 10% service fee, is credited to the customer’s account and used to reduce future escrow payments. Additional information follows: Escrow accounts liability, 1/1 $ 700,000 Escrow payments received during the year 1,580,000 Real estate taxes paid during the year 1,720,000 Interest on escrow funds during the year 50,000 What amount should Kent report as escrow accounts liability in its December 31 balance sheet? A. $515,000 B. $605,000 C. $610,000 D. $510,000
Answer (B) is   correct. The liability at the beginning of the year was $700,000. Escrow payments of $1,580,000 were credited and taxes paid of $1,720,000 were debited to the account during the year. Furthermore, interest of $45,000 [$50,000 – ($50,000 × 10%) service fee] was credited. Thus, the year-end balance was $605,000 ($700,000 + $1,580,000 – $1,720,000 + $45,000).
According to SFAC 5,   Recognition and Measurement in Financial Statements of Business Enterprises, the appropriate attribute for measuring plant assets is A. Net realizable value. B. Historical cost. C. Present value of future cash flows. D. Current cost.
Answer (B) is   correct. According to SFAC 5, plant assets should be valued at historical cost. “Property, plant, and equipment and most inventories are reported at their historical cost, which is the amount of cash, or its equivalent, paid to acquire an asset, commonly adjusted after acquisition for amortization or other allocations.”
A. 35% B. 27.5% C. 25% D. 15%
Answer (B) is   correct. In measuring a deferred tax liability or asset, the objective is to use the enacted tax rate(s) expected to apply to taxable income in the periods in which the deferred tax liability or asset is expected to be settled or realized. If graduated tax rates are a significant factor, the applicable tax rate is the average graduated tax rate applicable to the amount of estimated future annual taxable income.
Harold City’s fiduciary funds contained the following cash balances at December 31: Under the Forfeiture Act -- cash confiscated from illegal activities; disbursements used only for law enforcement activities (accounted for in an expendable trust fund prior to application of GASBS 34) $300,000 Sales taxes collected by Harold to be distributed to other governmental units 500,000 What amount of cash should Harold report in a special revenue fund at December 31? A. $800,000 B. $300,000 C. $500,000 D. $0
Answer (B) is   correct
Kids Are Wonderful Foundation, a not-for-profit agency, receives free electricity on a continuous basis from a local utility company. The utility company’s contribution is made subject to cancellation by the donor. Kids Are Wonderful should account for this contribution as a(n) A. Restricted revenue and an expense. B. Unrestricted revenue only. C. Unrestricted revenue and an expense. D. Restricted revenue only.
Answer (C) is   correct. SFAS 116 defines a contribution of utilities, such as electricity, as a contribution of other assets, not a contribution of services. A simultaneous receipt and use of utilities should be recognized as both an unrestricted revenue and expense in the period of receipt and use. The revenue and expense should be measured at estimated fair value. This estimate can be obtained from the rate schedule used by the utility company to determine rates charged to a similar customer.
Leer Corp.’s pretax income for the current year is $100,000. The temporary differences between amounts reported in the financial statements and the tax return are as follows: Depreciation in the financial statements was $8,000 more than tax depreciation. The equity method of accounting resulted in financial statement income of $35,000. A $25,000 dividend was received during the year, which is eligible for the 80% dividends received deduction (DRD). Leer’s effective income tax rate is 30%. In its income statement, Leer should report a current provision for income taxes of A. $23,400 B. $26,400 C. $18,600 D. $21,900
Answer (A) is   correct. Current tax expense is the amount of income taxes paid or payable for a year as determined by applying the provisions of the enacted tax law to the taxable income for that year
The partnership agreement of Axel, Berg & Cobb provides for the year-end allocation of net income in the following order: First, Axel is to receive 10% of net income up to $100,000 and 20% over $100,000. Second, Berg and Cobb are to receive 5% each of the remaining income over $150,000. The balance of income is to be allocated equally among the three partners. The partnership’s net income for the year was $250,000 before any allocations to partners. What amount should be allocated to Axel? A. $101,000 B. $108,000 C. $110,000 D. $106,667
Answer (B) is   correct. Axel initially receives $40,000 {($100,000 × 10%) + [($250,000 – $100,000) × 20%]}. The remaining income is $210,000 ($250,000 – $40,000). Of this amount, Berg and Cobb receive $3,000 each [($210,000 – $150,000) × 5%], a total of $6,000. The balance is allocated equally [($250,000 – $40,000 – $6,000) ÷ 3 = $68,000]. Thus, Axel receives a total of $108,000 ($40,000 + $68,000).
A statement of cash flows is to be presented in general-purpose external financial statements by which of the following? A. Privately held business enterprises only. B. All business enterprises and not-for-profit organizations. C. Publicly held business enterprises only. D. All business enterprises.
Answer (B) is   correct. SFAS 95 as amended by SFAS 117 requires a statement of cash flows as part of a full set of financial statements of all business entities (both publicly held and privately held) and not-for-profit organizations.
GASBS 34 requires that budgetary comparison schedules A. Be reported for the general fund and each major special revenue fund with a legally adopted budget. Convert the appropriated budget information to the GAAP basis for comparison with actual amounts reported on that basis. B. C. Be presented instead of budgetary comparison statements included in the basic statements. D. Compare only the final appropriated budget with actual amounts.
Answer (A) is   correct. Under GASBS 34, certain information must be presented as RSI in addition to MD&A. Budgetary comparison schedules must be reported for the general fund and each major special revenue fund with a legally adopted annual budget. A schedule includes the original budgets, that is, the first complete appropriated budgets; the final appropriated budgets; and the actual inflows, outflows, and balances stated on the budgetary basis of accounting. Thus, budgetary comparison schedules are not required for proprietary funds, fiduciary funds, and governmental funds other than the general fund and major special revenue funds.
Which of the following statements is true about a lease held by an entity acquired in a business combination? The amounts assigned to the lease asset and obligation are based on their fair values as of the date of the business combination. A. The lease should be accounted for by the acquiring entity in the same manner that it was accounted for (both classification and measurement) by the acquired entity. B. The classification of a lease in accordance with the criteria of SFAS 13 is based on the amounts assigned to the lease at the date of the business combination. C. The provisions of a lease that are modified in connection with the business combination are disregarded in the classification of the lease. D
Answer (A) is   correct. FASB Interpretation No. 21, Accounting for Leases in a Business Combination, requires that the amounts assigned to lease assets acquired and lease liabilities assumed at the date of the business combination be determined in accordance with SFAS 141,   Business Combinations. Thus, the cost of the acquired entity is allocated based on the estimated fair values of assets acquired and liabilities assumed at the acquisition date.
Jay & Kay partnership’s balance sheet at December 31, Year 3, reported the following: Total assets $100,000 Total liabilities 20,000 Jay, capital 40,000 Kay, capital 40,000 On January 2, Year 4, Jay and Kay dissolved their partnership and transferred all assets and liabilities to a newly formed corporation. At the date of incorporation, the fair value of the net assets was $12,000 more than the carrying amount on the partnership’s books, of which $7,000 was assigned to tangible assets and $5,000 was assigned to goodwill. Jay and Kay were each issued 5,000 shares of the corporation’s $1 par value common stock. Immediately following incorporation, additional paid-in capital in excess of par should be credited for A. $77,000 B. $70,000 C. $68,000 D. $82,000
Answer (D) is   correct. The net assets of the partnership, including goodwill, are transferred at fair value. Hence, the $92,000 fair value of the net assets ($100,000 carrying amount of partnership assets + $12,000 excess of fair value over carrying amount – $20,000 liabilities) measures the amount credited to contributed capital. The credit to common stock is $10,000 (5,000 shares × $1 par × 2), and the credit to additional paid-in capital is $82,000 ($92,000 – $10,000).
For the year ended December 31, Beal Co. estimated its allowance for uncollectible accounts using the year-end aging of accounts receivable. The following data are available: Allowance for uncollectible accounts, 1/1 $42,000 Provision for uncollectible accounts during the year (2% on credit sales of $2,000,000) 40,000 Uncollectible accounts written off, 11/30 46,000 Estimated uncollectible accounts per aging, 12/31 52,000 After year-end adjustment, the uncollectible accounts expense should be A. $52,000 B. $46,000 C. $48,000 D. $56,000
Answer (D) is   correct.
In a statement of cash flows, payments to acquire debt instruments of other entities (other than cash equivalents and debt instruments acquired specifically for resale) should be classified as cash outflows for A. Operating activities. B. Investing activities. C. Financing activities. D. Lending activities.
Answer (B) is   correct. Investing activities include the lending of money; the collection of those loans; and the acquisition, sale, or other disposal of (1) loans and other securities that are not cash equivalents and that have not been acquired specifically for resale and (2) property, plant, equipment, and other productive assets.
During Year 6, Wall Co. purchased 2,000 shares of Hemp Corp. common stock for $31,500 that are classified as trading securities. The fair value of this investment was $29,500 at December 31, Year 6. Wall sold all of the Hemp common stock for $14 per share on December 15, Year 7, incurring $1,400 in brokerage commissions and taxes. In its income statement for the year ended December 31, Year 7, Wall should report a recognized loss of A. $1,500 B. $2,900 C. $4,900 D. $3,500
Answer (B) is   correct. A realized loss or gain is recognized when an individual security is sold or otherwise disposed of. Under SFAS 115, Wall would have included the $2,000 ($31,500 – $29,500) decline in the fair value of the trading securities (an unrealized holding loss) in earnings at 12/31/Yr 6. Consequently, the realized loss on disposal at 12/15/Yr 7 is $2,900 {$29,500 carrying amount – [(2,000 shares × $14) – $1,400]}.
During its current fiscal year, a municipality issued the following debt instruments: Tax anticipation notes (proceeds received by the general fund) $2,500,000 Utility bonds 3,000,000 General obligation bonds issued to finance a capital project 8,000,000 How much of this debt should be reported in the fund financial statements? A. $5,500,000 B. $10,500,000 C. $11,000,000 D. $13,500,000  
Answer (A) is   correct. General long-term liabilities are reported only in the governmental activities column of the government-wide statement of net assets. They include the unmatured principal amounts of general obligation indebtedness. Accordingly, the general obligation bond issue is a general long-term liability. Its proceeds presumably will be accounted for in a capital projects fund (a governmental fund). However, a long-term liability is not recognized in a governmental fund. Tax and revenue anticipation notes, if no intent and ability to refinance on a long-term basis have been demonstrated, are reported as short-term liabilities in the government-wide financial statements and the governmental funds financial statements (if a governmental fund receives the proceeds). The utility bonds are long-term liabilities that should be accounted for in the public utilities enterprise fund and therefore should be reported in the government-wide financial statements and the proprietary funds financial statements. Thus, the debt reported in the governmental funds balance sheet is $2,500,000, and the debt reported in the proprietary funds statement of net assets (or balance sheet) is $3,000,000, a total of $5,500,000.
Which of the following statements is correct regarding reporting comprehensive income? A. A separate statement of comprehensive income is required. B. Comprehensive income is reported in the year-end statements but   not in the interim statements. C. Comprehensive income must include all changes in stockholders’ equity for the period. D. Accumulated other comprehensive income is reported in the stockholders’ equity section of the balance sheet.
Answer (D) is   correct. Total other comprehensive income is transferred to a component of equity separate from retained earnings and additional paid-in capital.
Manufacturing borrowed $500,000 from Howard Finance Co., secured by
Burn's present and future inventory, accounts receivable, and the
proceeds thereof. The parties signed a financing statement that
described the collateral and it was filed in the appropriate state
office. Burn subsequently defaulted in the repayment of the loan and
Howard attempted to enforce its security interest. Burn contended that
Howard's security interest was unenforceable. In addition, Green, who
subsequently gave credit to Burn without knowledge of Howard's security
interest, is also attempting to defeat Howard's alleged security
interest. The security interest in question is valid with respect to

  A) both Burn and Green. B) neither Burn nor Green. C) burn but not Green. D) green but not Burn.
Correct Answer: A

A creditor with a security interest will have
rights against a debtor when attachment has occurred. Three elements are
required for attachment: an agreement between the debtor and the
creditor, value must be given by the creditor and the debtor must have
rights in the collateral. Howard will have rights against Burn (debtor),
because there was a written security agreement, value was given by
Howard ($500,000) and the debtor had rights in the collateral (inventory
and accounts receivable). When two creditors are fighting over the same
collateral, usually the first creditor to perfect wins. Since Howard
perfected by filing before Green gave credit, Howard's security interest
has priority over Green.
Which of the following is not related to loans involving inventory?
a.  Factoring
b.  Blanket liens
c.  Trust receipts
d.  Warehousing
Answer:  A
Hagar Company's bank requires a compensating balance of 20% on a $100,000 loan.  If the stated interest on the loan is 7%, what is the effective cost of the loan?
a.  5.83%
b.  7.00%
c.  8.40%
d.  8.75%
Answer:  D
Before reporting on the financial statements of a U.S. entity that have been prepared in conformity with another country’s accounting principles, an auditor practicing in the U.S. should A. Understand the accounting principles generally accepted in the other country. B. Receive a waiver from the auditor’s state board of accountancy to perform the engagement. C. Notify management that the auditor is required to disclaim an opinion on the financial statements. D. Be certified by the appropriate auditing or accountancy board of the other country.
Answer (A) is   correct. AU 534 states that an independent auditor practicing in the U.S. may report on the financial statements of a U.S. entity prepared in conformity with accounting principles generally accepted in another country. However, the auditor must clearly understand, and obtain written representations from management about, the purpose and uses of the statements. (S)he must also comply with the general and field work standards of U.S. GAAS.
In planning an audit, the auditor’s knowledge about the design of relevant controls should be used to A. Document the assessed level of control risk. B. Identify the types of potential misstatements that could occur. C. Assess the operational efficiency of internal control. D. Determine whether controls have been circumvented by collusion.
Answer (B) is   correct. In every audit, the auditor must obtain an understanding of the five components of internal control sufficient to plan the audit. The understanding extends to (1) the design of relevant controls and (2) determining whether they have been implemented. This knowledge is used to (1) identify the types of potential misstatements, (2) consider the factors that affect the risk of material misstatements, (3) design tests of controls, if applicable, and (4) design substantive tests.
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