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You are an accountant working for Kunapipi Limited (Kunapipi) and are responsible for preparing tax effect accounting journal entries in accordance with AASB 112
Plack Co. purchased 10,000 shares (2o/o ownership) of Ty Corp. on February 14, Year 1. Plack received a
stock dividend of 2,000 shares on April 30, Year 1, when the market value per share was $35. Ty paid a cash dividend of $2 per share on December 15, Year 1. In its Year 1 income statement, what amount should Plack report as dividend income?
Explanation Choice “b” is correct. Dividend income= Number of shares x dividend per share
= 12,000 x $2
Receipt of a stock dividend is not revenue. It increases the number of shares held and decreases the cost
basis per share
Moss Corp. owns 20°/o of Dubro Corp.’s preferred stock and 40o/o of its common stock. Dubro’s stock
outstanding at December 31, Year 1, is as follows:
10°/o cumulative preferred stock
Dubro reported net income of $60,000 and paid dividends of $10,000 to its preferred shareholders for the
year ended December 31, Year 1. How much total revenue should Moss record due to its investment in
Since Moss owns 40°/o of Dubro’s common stock, the equity method is appropriate.
$100,000 x 10°/o =
$10,000 dividends x 20o/o ownership= $2,000 dividends received
Less preferred dividends
Net income available to common shareholders
Moss’ percentage owned
x 40°/o = $20,000 equity in earnings
Choice “a” is correct, $20,000 from equity in earnings plus $2,000 from dividend revenue.
On January 1, Year 2, Point, Inc. purchased 1 Oo/o of Iona Co.’s common stock. Point purchased additional shares bringing its ownership up to 40o/o of Iona’s common stock outstanding on August 1, Year 2. During October, Year 2, Iona declared and paid a cash dividend on all of its outstanding common stock. How much income from the Iona investment should Point’s Year 2 income statement report?
a. 10°/o of Iona’s income for January 1 to July 31, Year 2, plus 40% of Iona’s income for August 1 to
December 31 , Year 2.
b. 40°/o of Iona’s income for August 1 to December 31 , Year 2 only.
c. 40°/o of Iona’s Year 2 income.
d. Amount equal to dividends received from Iona
Choice “a” is correct. Once a cost method investor becomes an equity method investor, the investment
account must retroactively reflect the proportionate share of investee income recognized at each percentage level investment. Thus, 10% of Iona’s income from January 1 through July
Peel Co. received a cash dividend from a common stock investment. Should Peel report an increase in the investment account if it uses the cost method or the equity method of accounting?
On July 1, Year 1, Denver Corp. purchased 3,000 shares of Eagle Co.’s 10,000 outstanding shares of
common stock for $20 per share. On December 15, Year 1, Eagle paid $40,000 in dividends to its common
stockholders. Eagle’s net income for the year ended December 31, Year 1, was $120,000, earned evenly
throughout the year. In its Year 1 income statement, what amount of income from this investment should
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Under the cost method, receipt of a dividend is recorded as income and does not affect the investment
Under the equity method, receipt of a dividend is recorded as a decrease in the investment account.
Eagle’s Year 1 income $120,000
Percentage owned – x 30%
3,000 out of 10,000 shares 36,000
Owned for6 months (7 /1 /Year1 to 12/31 /Year 1)x 6/12
Income from investment in Eagle$ 18,000
Choice “b” is correct, $18,000 income from investment in Eagle Co. for Year 1.
1. Income from an investee is recognized only from date of purchase.
2. The dividends received reduce the investment account, but do not affect the income.
3. With 30°10 ownership, significant influence is assumed and the equity method is used.
Green Corp. owns 30°10 of the outstanding common stock and 100°10 of the outstanding noncumulative
nonvoting preferred stock of Axel Corp. In Year 1, Axel declared dividends of $100,000 on its
common stock and $60,000 on its preferred stock. Green exercises significant influence over Axel’s
operations. What amount of dividend revenue should Green report in its income statement for the
year ended December 31, Year1?
b. $30,000 c. $60,000 d. $90,000
Choice “c” is correct, $60,000. Because Green, the investor, exercises significant influence over
the investee corporation, it must use the equity method for recording common stock dividends.
Under the equity method, the common stock dividends are recorded as a reduction to the Investment
account. Preferred stock ownership does not allow the investor to exercise influence, so the
preferred stock investment is accounted for using the cost method and the preferred stock dividends
of $60,000 are recorded as dividend revenue on
the income statement.
A business combination is accounted for as an acquisition. Which of the following expenses related to the
business combination should be included, in total, in the determination of net income of the combined
corporation for the period in which the expenses are incurred?
Fees of finders Registration fees for
and consultants equity securities issued
Fees of finders and consultants are expensed in the period incurred. Registration fees
for equity securities issued decrease additional paid-in capital (stockholders’ equity).
POX Corp. acquired 1 OOo/o of the outstanding common stock of Sea Corp. in an acquisition transaction. The cost of the acquisition exceeded the fair value of the identifiable assets and assumed liabilities. The general guidelines for assigning amounts to the inventories acquired provide for:
a. Raw materials to be valued at original cost.
b. Work in process to be valued at the estimated selling prices of finished goods, less both costs to complete
and costs of disposal.
c. Finished goods to be valued at replacement cost.
d. Finished goods to be valued at estimated selling prices, less both costs of disposal and a reasonable
Choice “d” is correct. With acquisition accounting the net assets acquired are based on fair market value. The fair value of finished goods and merchandise inventory are based upon selling price less disposal costs and a reasonable profit allowance.
On November 30, Year 1, Parlor, Inc. purchased for cash at $15 per share all 250,000 shares of the
outstanding common stock of Shaw Co. At November 30, Year 1, Shaw’s balance sheet showed a carrying amount of net assets of $3,000,000. At that date, the fair value of Shaw’s property, plant and equipment exceeded its carrying amount by $400,000. In its November 30, Year 1, consolidated balance sheet, what amount should Parlor report as goodwill under U.S. GAAP?
Choice “c” is correct. Under U.S. GAAP, goodwill is the difference between the fair value of the subsidiary of $3,750,000 ($15 x $250,000) and fair market value of the net assets acquired, $3,400,000. $3,750,000 -$3,400,000 = $350,000.
On October 1, Year 1, Pepper Inc. acquired 100o/o of Salt Inc. for $275,000. On that date, the carrying values
of Salt lnc.’s assets and liabilities were $450,000 and $200,000, respectively. The fair values of Salt’s assets and liabilities were $550,000 and $200,000, respectively. Additionally, Salt had identifiable intangible assets at the time of acquisition with a fair value of $60,000. What is the gain to be reported on Pepper’s December 31, Year 1 consolidated income statement?
Choice “d” is correct. When acquiring a corporation with an acquisition cost that is less than the fair value of 100% of the underlying net assets acquired, the balance sheet, including any identifiable intangible assets, must be adjusted to fair value. This creates a negative balance in the acquisition cost account, which is recorded as a gain.
– Adjust BS to fair value (100,000)
– Record intangibles at FV (60,000)
Fair value of subsidiary
BV net assets Difference
The eliminating journal entry on the date of acquisition would be:
Dr.Equity – subsidiary (CAR) $250,000
Cr. Investment in subsidiary $275,000
Cr.Noncontrolling interest Balance sheet adjustment100,000
Cr. Intangible assets Gain 60,000
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Sayon Co. issues 200,000 shares of $5 par value common stock to acquire Trask Co. in an acquisitionbusiness
combination. The market value of Sayon’s common stock is $12. Legal and consulting fees
incurred in relationship to the purchase are $110,000. Registration and issuance costs for the common stock
are $35,000. What should be recorded in Sayon’s additional paid-in capital account for this business
Choice “c” is correct. In an acquisition method business combination, registration and issuance costs are
recorded as a direct reduction to the value of the stock issued by reducing APIC and direct out-of-pocket
costs such as legal and consulting fees are expensed. This business combination will be recorded as follows:
Dr. Legal & consulting expense$ 110,000
Dr. Investment in Trask2,400,000 (200,000 shares x $12/share)
Cr. Cash$ 145,000 ($110,000 + $35,000)
(200,000 shares x $5 par)
[200,000 shares x ($12 – $5)] – $35,000
Water Co. owns 80o/o of the outstanding common stock of Fire Co. On December 31 , Year 1, Fire sold
equipment to Water at a price in excess of Fire’s carrying amount, but less than its original cost. On a
consolidated balance sheet at December 31, Year 1, the carrying amount of the (cost less accumulated
depreciation) equipment should be reported at:
a. Water’s original cost.
b. Fire’s original cost.
c. Water’s original cost less Fire’s recorded gain.
d. Water’s original cost less 80°/o of Fire’s recorded gain.
Choice “c” is correct, on the consolidated balance sheet at 12/31 /Year 1, equipment should be reported at
Water’s original cost less Fire’s recorded gain (which equals Fire’s carrying value prior to sale).
Fire’s original cost 100
Accumulated depreciation prior to sale (40)
Net carrying value to Fire 60
Sale price to Water 75
Gain to Fire 15
Water’s “original” cost 75
Less Fire’s gain 15
Carrying value on consolidated financial statements 60
Rule: Fixed asset cost is based on original cost from the outside world and remains the same on the
consolidated financial statements.
P Co. purchased term bonds at a premium on the open market. These bonds represented 20 percent of the outstanding class of bonds issued at a discount by S Co., P’s wholly owned subsidiary. P intends to hold the bonds until maturity. In a consolidated balance sheet, the difference between the bond carrying amounts in the two companies would be:
a. Included as a decrease to retained earnings.
b. Included as an increase to retained earnings.
c. Reported as a deferred debit to be amortized over the remaining life of the bonds.
d. Reported as a deferred credit to be amortized over the remaining life of the bonds.
Choice “a” is correct, in a consolidated balance sheet, the difference between the bond carrying amounts
would be included as a decrease to retained earnings because a premium was paid to “retire” the bonds.
Rule: When members of a consolidated group have intercompany bond holdings, the bonds are eliminated inconsolidation and the difference (gain or loss) between the discounted issue price and the premium on reacquisition would be included in retained earnings
At December 31, Year 1, Grey, Inc. owned 90o/o of Winn Corp., a consolidated subsidiary, and 20o/o of Carr Corp., an investee in which Grey cannot exercise significant influence. On the same date, Grey had
receivables of $300,000 from Winn and $200,000 from Carr. In its December 31, Year 1 consolidated
balance sheet, Grey should report accounts receivable from affiliates of:
Choice “d” is correct, $200,000.
The receivable from Winn will be eliminated in the consolidation. The receivable from Carr will not be
eliminated (Carr is not a subsidiary). Grey reports accounts receivable from affiliates (Carr) of $200,000 in its consolidated balance sheet.
Combined statements may be used for companies under common
management or commonly controlled companies (e.g., individual owns many companies).
1. All intercompany transactions and balances among the related companies are eliminated.
2. Minority interests are treated as in consolidated financial statements.
3. Equity accounts are added across, not eliminated.
4. Income statement accounts are added across.
Which of the following is not a characteristic that is used to determine the primary beneficiary of a variable
interest entity (VIE) under U.S. GAAP?
a. Greater than 50°10 ownership of the VIE.
b. The power to direct the activities of the VIE.
c. The obligation to absorb expected VIE losses.
d. The right to receive the expected VIE residual returns.
Choice “a” is correct. Under the VIE model, the primary beneficiary is not required to have greater than 50% ownership of the VIE. The primary beneficiary is the entity that has the power to direct the activities of a
variable interest entity that most significantly impact the entity’s economic performance and absorbs the expected VIE losses and/or receives the expected VIE residual returns.
Which of the following is not an example of a variable interest in an entity?
a. An option to acquire a leased asset at fair value at the end of the lease term.
b. A forward contract to sell assets owned by the entity.
c. An explicit guarantee of the entity’s debt.
d. Accounts payable.
Choice “d” is correct. Most liabilities, excluding short-term trade payables (accounts payable), represent
Choice “a” is incorrect. An option to acquire a leased asset at fair value at the end of the lease term
represents a variable interest.
Choice “b” is incorrect. A forward contract to sell assets owned by the entity is a variable interest.
Choice “c” is incorrect. An explicit guarantee of the entity’s debt is a variable interest.
Which of the following circumstances would indicate that an entity has an insufficient level of equity
investment at risk?
a. The entity can finance its own activities.
b. The facts and circumstances indicate that there is sufficient equity at risk.
c. The fair value of the equity investment at risk is greater than expected losses.
d. The entity’s equity investment at risk is less than the equity investment at risk of similar non-VIE entities.
Choice “d” is correct. An entity has insufficient equity investment at risk if the entity’s equity investment at risk
is less than the equity investment at risk of similar non-VIE entities. An entity has sufficient equity investment at risk when the entity’s equity investment at risk is at least as much as the equity investment of other non-VIE entities that hold similar assets of similar quality.
Under IFRS, a sponsoring company must consolidate a special purpose entity (SPE):
a. When the company is the primary beneficiary of the SPE.
b. Only if the company has a >50°/o interest in the SPE.
c. If the company controls the SPE.
d. When the company has voting rights that are disproportionate to its economic interest
Choice “c” is correct. Under IFRS, a sponsoring company must consolidate an SPE if it controls the SPE.
Control exists when the sponsoring company is benefitted by the SPE’s activities, has decision making
powers that allow it to benefit from the SPE, absorbs the risks and rewards of the SPE, and has a residual
interest in the SPE.
Robin Co. has a marketable equity securities portfolio classified as available-for-sale. None of the holdings enables Robin to exercise significant influence over an investee. The aggregate cost exceeds its aggregate market value. The decline is considered temporary and should be reported as a (an):
a. Unrealized loss in the income statement.
b. Realized loss in the income statement.
c. Valuation allowance in the noncurrent liability section of the balance sheet.
d. Valuation allowance in the asset section of the balance sheet.
Choice “d” is correct. The temporary decline of an available-for-sale marketable equity securities portfolio below aggregate cost should be reported as a valuation allowance in the asset section of the balance sheet.
Rule: Temporary losses on available-for-sale securities (where aggregate cost exceeds aggregate market)
should be credited to an asset valuation account and debited direct to other comprehensive income.
• $3 million debt security bought and held for the purpose of selling in three years to finance payment of
Camp’s $2 million long-term note payable when it matures.
Choice “A” is correct. Available-for-sale securities are those marketable securities [debt and equity], whichwill be held longer than a year or operating cycle before disposal. These debt securities will not be held until maturity.
Seashell Corp. was organized to consolidate Sea Company and Shell Company in a business combination. Seashell issued 25,000 shares of its $10 par value common stock in exchange for all of the outstanding common stock of Sea and Shell. At the time of the consolidation, the fair market value of Sea’s and Shell’s assets and liabilities are equal to their book values. The shareholders’ equity accounts of Sea and Shell on the date of the consolidation were: Sea Shell Total
C/S PAR $100,000$200,000 $300,000
Apic 50,000 75,000 125,000
Retained Earnings22,500 47,500 70,000
Totals $172,500 $322,500 $495,000
Which of the following is the balance in Seashell’s additional paid-in capital account immediately following its issuing common stock to effect the consolidation?
Since Seashell’s stock is newly issued to effect the consolidation, it has no prior market value. In the absence of a market value, the fair value of Seashell’s stock is determined by the fair value of the net assets acquired in the consolidation. Therefore, the fair value of the stock issued is equal to the fair value (and book value) of the net assets acquired (i.e., A – L = SE), or $495,000. The par value of the stock issued is $250,000 (25,000 x $10). Therefore, additional paid-in capital is $495,000 – $250,000 = $245,000
On January 1, 20×1 Ritt Corp. purchased 80% of Shaw Corp.’s $10 par common stock for $975,000. Ritt’s cost reflects an appropriate fair value measure for all of Shaw’s outstanding common stock. The original cost to the noncontrolling investors for the 20% of Shaw’s common stock not acquired by Ritt was $200,000. At the date of Ritt’s purchase, the carrying amount of Shaw’s net assets was $1,000,000. The fair values of Shaw’s identifiable assets and liabilities were the same as their carrying amounts except for plant assets (net) which were $100,000 in excess of the carrying amount. Which one of the following is the amount of noncontrolling interest that should be reported in a consolidated balance sheet prepared immediately following the business combination?
Noncontrolling interest at the date of the business combination should be the noncontrolling interest proportionate share of total fair value at that date, including goodwill. The total fair value of Shaw (including goodwill) at the date Ritt acquired 80% of Shaw’s common stock would be $1,218,750 ($975,000/.80). The noncontrolling interest would be .20 x $1,218,750 = $243,705, the correct answer. The investment eliminating entry made immediately following the business combination would be:
DR: (Various) Identifiable Net Assets $1,100,000
CR: Investment in Shaw $975,000
(in Shaw) 243,750
On December 31, 2008, Pico acquired $250,000 par value of the outstanding $1,000,000 bonds of its subsidiary, Sico, in the market for $200,000. On that date, Sico had a $100,000 premium on its total bond liability.
Which one of the following is the net amount of gain or loss that will be recognized by Pico in its December 31, 2008, consolidated financial statements as a result of its intercompany bonds?
In the elimination of intercompany bonds, the intercompany bond liability at par will be eliminated against the intercompany bond investment at par. Therefore, the gain or loss recognized as a result of constructive retirement of intercompany bonds is the net of the premium or discount on the bond liability and the premium or discount on the bond investment. In this case, there is a total $100,000 premium on the bond liability, but because only one-fourth ($250,000/$1,000,000 = 1/4) of the bonds are intercompany, only one fourth of the premium is eliminated. Thus, $25,000 of premium on the bond liability (a credit) will be eliminated against the $50,000 discount on the bond investment (also a credit). As a result of eliminating the two credits ($25,000 + $50,000 = $75,000), a $75,000 gain on constructive retirement will be recognized.
On December 31, 2008, Pico acquired $250,000 par value of the outstanding $1,000,000 bonds of its subsidiary, Sico, in the market for $200,000. At that date, Sico had a $100,000 premium on its total bond liability.
Assume each company maintains its premium or discount in a separate account. Which one of the following will be the intercompany bond elimination entry made on the December 31, 2008 consolidating worksheet?
The Investment in Bonds (a debit balance, so it will be credited) and the Bonds Payable (a credit balance, so it will be debited) will be eliminated against each other at par value ($250,000). The Discount on Bond Investment $50,000 (a credit balance, so it will be debited) and the Premium on Bonds Payable $25,000 (a credit balance, so it will be debited) will be eliminated resulting in a Gain on Constructive Retirement of $75,000, a credit balance. Therefore, the correct entry would be:
DR: Bonds Payable
Premium on Bonds Payable
Discount on Bond Investment
CR: Investment in Bonds
Gain on Constructive Retirement
On December 1, 2008, Speco acquired a stock option for more than the then-current market price. Speco intended to hold the option for approximately 90 days and hoped to sell it at a profit. On December 31, 2008, the fair value of the option was $2,000. On February 28, 2009, the option was sold in the market by Speco for $1,800.
Which one of the following is the amount of gain or loss recognized on the derivative by Speco in its 2008 net income?
Since Speco acquired the stock option for profit-making purposes, not as a hedging instrument, any gain or loss in fair value which occurred during each period would be recognized in net income of the period during which the fair value changed. Also, since the option cost was more than the market price at the date of purchase, it had no value at acquisition. Thus, there would be a $2,000 gain for 2008 (and a $200 loss in 2009
Bigco, Inc. transferred long-term receivables with a carrying value of $500,000 and a fair value of $450,000 to Banco for $425,000 cash. Of the $450,000 fair value, $45,000 is attributable to collection of future fees and penalties, which Bigco will retain. The surrender of control requirements have been met, therefore the transfer qualifies as a sale. What amount of loss should Bigco recognize at the time of the transfer?
Bigco’s loss is the difference between the carrying value of the portion of the asset transferred and the cash received for the transferred portion. In this case, the total carrying value of $500,000 must be allocated between the portion of the asset surrendered and the portion retained, based on relative fair values. The relative fair values are:
Asset retained $ 45,000 10%
Asset transferred 405,000 __90_
Total fair value $450,000 100%
Therefore, the carrying value of the asset transferred is .90 x $500,000 = $450,000. The resulting loss is carrying value transferred $450,000 – cash received $425,000 = $25,000 loss.
On May 15, 2003, Munn, Inc. approved a plan to dispose of a segment of its business. It is expected that the sale will occur on February 1, 2004, at a selling price of $500,000. The segment reported $195,000 in operating losses for 2003. The segment is expected to lose $30,000 from operations in 2004. The carrying amount of the segment at the date of sale was expected to be $850,000. Before income taxes, what amount should Munn report as a loss from discontinued operations in its 2003 income statement?
There are two components for discontinued operations: (1) the operating income or loss for the period in which the decision is made to dispose, and (2) the disposal loss. Only actual operating income (or loss) is recognized, but estimated as well as actual disposal losses are recognized. The $350,000 estimated disposal loss is the difference between the $850,000 carrying value of the segment, and its $500,000 estimated selling price. The operating loss for the period ($195,000) plus the estimated disposal loss ($350,000) equals the $545,000 total loss to be recognized for discontinued operations for 2003.
If the fair value option was elected for held-to-maturity and available-for-sale investments, any gains and losses resulting from change in fair value of those investments will be shown in net income. If the fair value option was not elected, there would be no gains or losses on the held-to-maturity investments, and gains and losses on available-for-sale investments would be reported in other comprehensive income.
In determining the fair value of an asset, the market based exit price should be adjusted for
Transaction Cost Transportation Cost
In determining the fair value of an asset, 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 market.
In the determination of fair value of a nonfinancial asset, is the highest and best use of the asset determined as occurring through use and/or through exchange?
In determining the fair value of a nonfinancial asset, how the reporting entity would use the asset would not be taken into account in assessing the highest and best use of the asset. The highest and best use is based on use of the asset by market participants, not by the reporting entity.
Multico is a securities dealer whose principal market is with other securities dealers. To take advantage of a perceived opportunity, on December 31, the end of its fiscal year, Multico acquired a financial asset in a market other than its principal market for $50,000. At that date, the identical instrument could be sold in Multico’s principal market for $50,100 with a $200 transaction cost. Which of the following amounts would constitute fair value to Multico for the financial asset at December 31?
This incorrect answer ($49,900) results from using Multico’s exit price ($50,100), but incorrectly deducting the cost to execute the transaction ($200), or $50,100 – $200 = $49,900. Since Multico could have sold (an exit price) the instrument in its principal market for $50,100, that is its fair value. The transaction cost to execute the sale should not be deducted from the market price to get fair value.
Assume a U.S. entity purchases shares of a German company for 1,000,000 Euros on March 1, 2008, when the exchange rate was 1 Euro = $1.20. The investment is classified as available-for-sale by the U.S. entity. After holding the shares for nine months, it sold the entire investment in the foreign market for 1,200,000 Euros, when the exchange rate was 1 Euro = $1.33. What amount of investment gain or loss would the U.S. entity recognize as a result of the investment?
The question asks for the amount of the investment gain or loss (only), not about the exchange gain or loss or the net gain or loss (exchange +/- investment). The investment gain or loss would be determined as the change in the total number of Euros between the cost of the investment (1,000,000E) and the sale of the investment (1,200,000E), or 200,000E multiplied by the exchange rate in effect when the investment was made (1 Euro = $1.20). Therefore, the gain on investment would be 200,000E x $1.20 = $240,000, the correct answer.
Which of the following actions would an entity most likely take to hedge an investment in a foreign operation?
A. Invest in the debt securities of the same foreign operation.
B. Invest in the equity securities of another foreign entity with the same foreign currency as the operation being hedged.
C. Invest in the debt securities of another foreign entity with the same foreign currency as the operation being hedged.
D. Borrow from another foreign entity with the same foreign currency as the operation being hedged.
Borrowing from another foreign entity with the same foreign currency as the operation being hedged would hedge the (equity) investment in the foreign operation. Since the equity investment in a foreign operation is an asset and the borrowing would be a liability, both in the same foreign currency, a change in the exchange rate would have offsetting effects. Thus, if an exchange rate change caused a decrease in the value of the investment (asset), it would cause an increase in the value of the borrowing (liability)
Pinco, a U.S. entity, has a 100% owned subsidiary, Sinco, located in a foreign country. In order to hedge its investment in the foreign operation, Pinco has a long-term borrowing in the same foreign currency in an amount approximating its net equity in the subsidiary. For 2008, the translated value of Sinco’s balance sheet decreased by $40,000, and the converted value of Pinco’s long-term debt decreased by $42,000. Which one of the following is the net amount that Pinco should recognize in other comprehensive income for 2008?
Since Pinco designated the long-term borrowing to hedge its investment in its foreign operation, the amount of the change in the borrowing equal to the amount of the change in the translated value of the investment should be reported as a translation adjustment (along with the change in the translated value of the investment) in other comprehensive income, and the balance should be reported in current income. Therefore, Pinco would report a $40,000 decrease and a $40,000 increase as translation adjustments, offsetting each other. The remaining $2,000 would be reported in current income.
On December 1 of the current year, Bann Co. entered into an option contract to purchase 2,000 shares of Norta Co. stock for $40 per share (the same as the current market price) by the end of the next two months. The time value of the option contract is $600. At the end of December, Norta’s stock was selling for $43, and the time value of the option was now $400. If Bann does not exercise its option until January of the subsequent year, which of the following changes would reflect the proper accounting treatment for this transaction on Bann’s December 31, year-end financial statements?
An option is a financial derivative and must be reported as either an asset or liability at fair value, with any change in fair value recognized in income of the period that the fair value changes (unless the option is used as a hedge). At the date the option contract was initiated, it had no intrinsic value (the strike price was the same as the current price), but had a time value of $600 (given). At December 31, the time value had decreased to $400, a decline of $200, but the intrinsic value had increased by $6,000, computed as the change in the market price from $40 per share to $43 per share, an increase of $3 x 2,000 shares (the option quantity) = $6,000. Thus, the net change in fair value, and the amount of gain that would be recognized in December 31 financial statements, is + $6,000 – $200 = $5,800, the correct answer.
Which one of the following hedges using a forward contract will require the recognition of a new asset or liability if a gain or loss occurs on the hedging instrument?
A. Forecasted transaction hedge.
B. Firm commitment hedge.
C. Recognized asset or liability hedge.
D. Net investment in foreign operations hedge.
The hedge of a firm commitment is a fair value hedge, with changes in the fair value of the forward contract (hedging instrument) reported as an increase or decrease to the forward contract and a gain or loss recognized in current income. A change in the fair value of the firm commitment (hedged item) would be recognized as a loss or gain in current income, together with the recognition of a previously unrecognized firm commitment asset or liability for the amount of the change
A hedge to offset the risk of exchange rate changes on planned transactions is which of the following types of hedge?
A. Cash flow hedge.
B. Fair value hedge.
C. Either a cash flow hedge or a fair value hedge, at management’s discretion.
D. Neither a cash flow hedge nor a fair value hedge.
A hedge to offset the risk of exchange rate changes on a planned transaction would be the hedge of a forecasted transaction, which is a cash flow hedge. Such a hedge is not a fair value hedge, in part, because no “fair value” has been established for the planned or expected transaction
A hedge to offset the risk of exchange rate changes on the converted value of financial statements is most like to be which of the following types of hedge?
A. Cash flow hedge.
B. Fair value hedge.
C. Either a cash flow hedge or a fair value hedge, at management’s discretion.
D. Neither a cash flow hedge nor a fair value hedge.
A hedge to offset the risk of exchange rate changes on the converted value of financial statements is the hedge of an investment in foreign operations, which is a fair value hedge. This hedge also is referred to as an “economic hedge.
A U.S. entity has an operating subsidiary located in England. The subsidiary, which maintains its books and prepares it financial statements in the pound sterling, acquires and sells its goods in Euros almost exclusively in European Economic Union (EEU) countries. Which one of the following conversion methods is the U.S. parent most likely to use in converting the subsidiary’s financial statements to dollars?
C. Remeasurement and then translation.
D. Translation and then remeasurement.
Since the subsidiary operates primarily in the EEU and generates and expends cash primarily in the Euro, the pound sterling is not its functional currency, the Euro is. Therefore, its financial statements would have to be remeasured from the pound sterling to the Euro and then translated into dollars.
Panco, a U.S. entity, has a subsidiary, Sanco, located in a foreign country. Sanco’s operations are concentrated in the country in which it is located and are essentially independent of Panco. The economy of the foreign country is not highly inflationary. Which one of the following processes should Panco use to convert Sanco’s financial statements to dollar-based statements for consolidation purposes?
C. Translation, and then remeasurement
D. Remeasurement, and then translation.
Because Sanco operations are concentrated in the country in which it is located and essentially independent of Panco, and the economy of the foreign country is not highly inflationary, Sanco’s local foreign currency is its functional currency. Therefore, its financial statements expressed in the foreign currency will be converted to U.S. dollars using translation
On July 1, 2004, 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, 2004, Rudd received and recorded a $700 invoice for a new engine installed in the van in May 2004, 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 2004 income statement?
The gain of $300 is the difference between the insurance proceeds and the sum of the carrying value of the van plus the cost of the new engine. The repair cost is expensed. It does not increase the value of the van. $300 = $3,500 – $2,500 – $700.
Under IFRS the test for asset impairment is to compare the carrying value of the asset to its recoverable amount. Which of the following is the recoverable amount according to IFRS?
A. The greater of future undiscounted cash flows or future discounted cash flows.
B. The greater of future discounted cash flows or fair value.
C. The greater of fair value less cost to sell or value in use.
D. The greater of fair value or value in use.
The greater of fair value less cost to sell or value in use is the recoverable amount according to IFR
A company has a long-lived asset with a carrying value of $120,000, expected future cash flows of $130,000, present value of expected future cash flows of $100,000, and a market value of $105,000. Under IFRS what amount of impairment loss should be reported?
This response is the difference between carrying value and recoverable amount. According to IFRS the recoverable amount is the greater of fair value less cost to sell ($105,000) or value in use ($100,000). Value in use is the discounted cash flows. Therefore, this asset is has an impairment of $15,000 because the recoverable amount is $105,000 and the carrying value is $120,000.
Bard Co., a calendar-year corporation, reported income before income tax expense of $10,000 and income tax expense of $1,500 in its interim income statement for the first quarter of the year. Bard had income before income tax expense of $20,000 for the second quarter and an estimated effective annual rate of 25%. What amount should Bard report as income tax expense in its interim income statement for the second quarter?
Interim income tax expense equals the difference between (1) the total income tax through the end of the interim period at the estimated annual tax rate, and (2) the income tax expense recognized in previous interim periods of the same year. For the second quarter, income tax expense therefore is computed as ($10,000 + $20,000)(.25) – $1,500 = $6,000.
Main, a pharmaceutical company, leased office space from Ash. Main took possession and began to use the building on July 1, 2000. Rent was due the first day of each month. Monthly lease payments escalated over the 5-year period of the lease as follows:
Period Lease Payment
July 1, 2000 – September 30, 2000 $0 – rent abatement during move-in, construction
October 1, 2000 – June 30, 2001 17,500
July, 1, 2001 – June 30, 2002 19,000
July 1, 2002 – June 30, 2003 20,500
July 1, 2003 – June 30, 2004 23,000
July 1, 2004 – June 30, 2005 24,500
What amount would Main show as deferred rent expense at December 31, 2003?
This is an operating lease. Thus, the rent expense should be recognized on a straight-line basis. Monthly rent expense would be
(12-3) x $17,500 = $157,500
12 x $19,000 = $228,000
12 x $20,500 = $246,000
12 x $23,000 = $276,000
12 x $24,500 = $294,000
Total = $1,201,500
1,201,500/60 months = $20,025 rent expense each month. The deferred rent expense at 12/31/2003 would be the difference between the monthly rent payment and the rent expense recognized each month multiplied by the number of months left on the lease. This would be
($23,000-$20,025) x 6 months = $17,850
($24,500-$20,025) x 12 months = $53,700
$17,850 + $53,700 = $71,550.
A company enters into a three-year operating lease agreement effective January 1, year 1. The amounts due on the first day of each year are $25,000 in year 1, $30,000 in year 2, and $35,000 in year 3. What amount, if any, is the related liability on the first day of year 2?
For operating leases, rent expense is recognized on a straight-line basis unless the lessee is receiving benefits from the leased asset in some other manner. This is true even if the payment schedule is uneven, as is the case here. Annual rent expense, therefore, is $30,000 [= ($25,000 + $30,000 + $35,000)/3]. As of 1/1/2, the lessee has recognized $30,000 of expense but paid only $25,000. Therefore, a liability of $5,000 is reported. The lessee owes $5,000 on this date because it has obtained $30,000 worth of use of the asset but paid only $25,000. This answer is correct assuming that the question is asking for the liability amount before the payment due 1/1/2 is made.
On July 1, 2004, Gee, Inc. leased a delivery truck from Marr Corp. under a 3-year operating lease. Total rent for the term of the lease was $36,000, payable as follows:
12 months at $500 = $6,000
12 months at $750 = 9,000
12 months at $1,750 = 21,000
All payments were made when due. In Marr’s June 30, 2006 balance sheet, the accrued rent receivable should be reported as
Assuming the payment schedule is in chronological order, rent revenue is recognized faster than cash is received because the required rent payments increase in amount over the term. The amount of rent revenue (expense) to be recognized each year is $12,000 ($36,000/3) – this is the straight-line basis.
As of 6/30/06, 2 years or two-thirds of the lease term has elapsed. Therefore, $24,000 of rent revenue has been recognized, but only $15,000 cash has been received to that point.
Therefore, the lessor has $9,000 in rent receivable for the revenue recognized but not yet received in cash. The lessor has provided two-thirds of the value of the rental period but has collected less than that amount.
On January 1, 2004, Harrow Co. as lessee signed a 5-year noncancelable equipment lease with annual payments of $100,000 beginning December 31, 2004.
Harrow treated this transaction as a capital lease. The five lease payments have a present value of $379,000 at January 1, 2004 based on interest of 10%.
What amount should Harrow report as interest expense for the year ending December 31, 2004?
The beginning lease liability balance at 1/1/04 is $379,000. That balance is unchanged the entire year because the first lease payment is made 1 year later. Therefore, the interest expense for the first year is $37,900 (.10 x $379,000).
On January 1, 2005, 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, 2005 and continuing each year for 30 years. The lease qualifies as a capital lease. On January 1, 2005, the present value of the lease payments is $112,500 at the 8% interest rate implicit in the lease.
In Blaugh’s December 31, 2005 balance sheet, the capital lease liability should be
The entry at December 31, 2005:
Interest expense ($112,500 x .08) 9,000
Lease liability 1,000
The ending lease liability for 2005 is $111,500 ($112,500 – $1,000 from entry).
On December 31, 2005, Neal, Inc. leased machinery with a fair value of $105,000 from Frey Rentals Co. The agreement is a 6-year noncancelable lease requiring annual payments of $20,000 beginning December 31, 2005.
The lease is appropriately accounted for by Neal as a capital lease.
Neal’s incremental borrowing rate is 11%. Neal knows the interest rate implicit in the lease payments is 10%.
• The present value of an annuity due of $1 for 6 years at 10% is 4.7908.
• The present value of an annuity due of $1 for 6 years at 11% is 4.6959.
In its December 31, 2005 balance sheet, Neal should report a lease liability of
The $75,816 lease liability at December 31, 2005 is the initial liability at inception less the first payment, which is completely a principal payment. The first payment occurs at inception and therefore could have no interest component. The initial liability at inception is the present value of an annuity due of six periods.
Ending 2005 lease liability = liability at inception – $20,000 first payment
= $20,000(4.7908) – $20,000
The lessee must use the lower of its incremental borrowing rate (11%) and the rate implicit in the lease (10%), hence the use of the 4.7908 present value factor.
Jay’s lease payments are made at the end of each period. Jay’s liability for a capital lease would be reduced periodically by the
A. Minimum lease payment less the portion of the minimum lease payment allocable to interest.
B. Minimum lease payment plus the amortization of the related asset.
C. Minimum lease payment less the amortization of the related asset.
D. Minimum lease payment.
Each lease payment includes interest based on the lease liability at the beginning of the period. The amount of each payment exceeding the interest component is the amount of principal reduction. This amount reduces the lease liability used to compute the interest portion of the next payment.
Thus, the interest component decreases with each payment as more principal is paid off
What are the components of the lease receivable for a lessor involved in a direct-financing lease?
A. The minimum lease payments plus any executory costs
B. The minimum lease payments plus residual value
C. The minimum lease payments less residual value
D. The minimum lease payments less initial direct costs
The net lease receivable initial balance is the present value of the minimum lease payments (payments expected to be received under the lease) plus the present value of the residual at the end of the lease term. The value used for the residual (before discounting) is the estimated fair value of the asset at the end of the lease term, not the end of the asset’s useful life.
Winn Co. manufactures equipment that is sold or leased. On December 31, 2005, Winn leased equipment to Bart for a 5-year period ending December 31, 2010, at which date ownership of the leased asset transferred to Bart.
Equal payments under the lease were $22,000 (including $2,000 executory costs) and were due on December 31 of each year.
The first payment was made on December 31, 2005. Collectability of the remaining lease payments was reasonably assured, and Winn had no material cost uncertainties. The normal sales price of the equipment was $77,000, and cost was $60,000.
For the year ending December 31, 2005, what amount of income should Winn realize from the lease transaction?
This is a capital lease to the lessor because ownership is transferred to the lessee. There is no interest revenue in 2005 because the lease inception and the balance sheet date are the same. The first payment, thus, includes no interest.
The lease is a sales-type lease to the lessor because the normal selling price of $77,000 exceeds the cost of $60,000. The difference of $17,000 is the dealer profit to be recognized in 2005. There is no other income to be recognized in 2005.
The equipment’s useful life is 10 years, and the interest rate implicit in the lease is 10%. The capital lease obligation was recorded on December 30, 2004 at $135,000, and the first lease payment was made on that date.
What amount should Rafferty include in current liabilities for this capital lease in its December 31, 2004 balance sheet?
The lease liability at the end of 2004 is $115,000 ($135,000 – $20,000) because the first payment has been made and it consisted only of principal.
The entry to be made at the end of 2005 will be:
Interest expense .10($115,000) 11,500
Lease liability 8,500
The amount of the lease liability to be extinguished in 2005 is $8,500 as shown in the entry. Therefore, as of December 31, 2004, the current portion of the lease liability is $8,500, the amount due within 1 year of the balance sheet date.
Robbins, Inc. leased a machine from Ready Leasing Co. The lease qualifies as a capital lease and requires 10 annual payments of $10,000 beginning immediately.
The lease specifies an interest rate of 12% and a purchase option of $10,000 at the end of the tenth year, even though the machine’s estimated value on that date is $20,000. Robbins’ incremental borrowing rate is 14%.
The present value of an annuity due of $1 at:
12% for 10 years is 6.328
14% for 10 years is 5.946
The present value of $1 at:
12% for 10 years is .322
14% for 10 years is .270
What amount should Robbins record as lease liability at the beginning of the lease term?
The $66,500 beginning balance of the lease liability is the present value of the minimum lease payments, which includes the bargain purchase option.
The lower of the two rates should be used to capitalize the lease. $66,500 = $10,000(6.328) + $10,000(.322).
The bargain purchase option uses a single value present value facto
An asset with a market value of $100,000 is leased on 1/1/x1. The lease is a capital lease for both parties. Five annual lease payments are due each December 31 beginning 12/31/x1. The unguaranteed residual value on 12/31/x5, the last day of the lease term, is estimated at $40,000. The lessor’s implicit interest rate is 8%. Compute the lessor’s net lease receivable immediately after the first lease payment is received. Present value factors for 5 years at 8% are: 3.99271 and 0.68058.
The lease payment (LP) is computed as: $100,000 = LP(3.99271) + $40,000(0.68058). Solving, LP = $18,227. The initial gross lease receivable balance is 5($18,227) $40,000 or $131,135. Unearned interest is recorded for $31,135 ($131,135 – $100,000) at inception. Interest revenue for the first year is $8,000 (= $100,000 x .08). The journal entry for the first lease payment is: dr. Cash $18,227, dr. unearned interest $8,000, cr. interest revenue $8,000, cr. lease receivable $18,227. The decrease in net lease receivable is $18,227 – $8,000 or $10,227. The ending net lease receivable at year end is $100,000 – $10,227 = $89,7
Choose the correct statement concerning transactions involving the issuance of shares in payment of obligations for goods and services.
A. When the value of shares to be issued is fixed, the number of shares to be issued is variable.
B. When the value of shares to be issued is fixed, the number of shares to be issued is fixed.
C. When the number of shares to be issued is fixed, the expense to be recorded is variable.
D. When the number of shares to be issued is fixed, the issuing firm records a liability.
The value of the shares to be issued is the value of the contract or the agreed-upon value of the goods and services for the two parties. If the stock price changes between the time of contracting and the delivery of the goods or services, the number of shares changes in order to provide that fixed value.
A firm selling put options to sell the firm’s stock
A. Increases owners’ equity for the fair value of the options.
B. Does not recognize any change in its financial position at sale of the options.
C. Increases a liability for the fair value of the options.
D. Records an expense equal to the fair value of the options.
The liability will be extinguished when the option is exercised or when it expires.c
Renwood, Inc. contracted for services to be provided over a period of time in return for 2,000 shares of Renwood’s $5 par common stock when the service is completed. At the time, Renwood stock was selling for $10 per share. When the service was completed, Renwood’s stock price was $12 per share. Therefore, Renwood
A. Recognizes $24,000 of expense.
B. Increases the common stock account $12,000.
C. Increases contributed capital in excess of par $10,000.
D. Credits a liability for $20,000.
The total owners’ equity increase of $20,000 (2,000 shares x $10) is recorded at signing. Of that amount, the common stock account will receive $10,000 (2,000 shares x $5 par). Therefore, the remainder ($10,000) is allocated to contributed capital in excess of par. Subsequent changes in stock price do not change the total amount of OE recorded.
Allam, Inc. contracted for services to be provided over a period of time with full payment in Allam’s $2 par common stock when the service is completed. At the time of the agreement, Allam stock was trading at $20 per share. The agreed-upon total value of the contract is $20,000. When the service was completed, Allam’s stock price was $25 per share. Therefore, Allam
A. Recognizes $25,000 of expense.
B. Increases the common stock account $1,600.
C. Increases contributed capital in excess of par $23,000.
D. Debits a liability for $25,000.
The value of the stock to be issued is $20,000. At time of issuance, the stock price is $25. Therefore, 800 shares are issued ($20,000/$25). The par value of the stock is $2, requiring a credit of $1,600
Yola Co. and Zaro Co. are fuel oil distributors. To facilitate the delivery of oil to their customers, Yola and Zaro exchanged ownership of 1,200 barrels of oil without physically moving the oil. Yola paid Zaro $30,000 to compensate for a difference in the grade of oil.
On the date of the exchange, cost and market values of the oil were as follows:
Yola Co. Zaro Co.
Cost $100,000 $126,000
Market values 120,000 150,000
In Zaro’s income statement, what amount of gain should be reported from the exchange of the oil?
This exchange was made to facilitate a sale of inventory to customers.
Under FAS 153, this is one of the exceptions to measuring exchanges of nonmonetary assets at market value. In this case, the exchange is measured at book value; no gain or loss is recognized. The oil received by Zaro would be measured (debited) at book value ($126,000) less cash received ($30,000), or $96,000. Cash would be debited for $30,000. The oil exchanged would be credited for $126,000.
No gain or loss is recognized
On January 1, Feld traded a delivery truck and paid $10,000 cash for a tow truck owned by Baker. The delivery truck had an original cost of $140,000, accumulated depreciation of $80,000, and an estimated fair value of $90,000. Feld estimated the fair value of Baker’s tow truck to be $100,000. The transaction had commercial substance. What amount of gain should be recognized by Feld?
The book value of the delivery truck is $60,000 ($140,000 – $80,000). Its fair value is $90,000. A gain of $30,000 is therefore implied. Cash was paid and the exchange had commercial substance. Therefore, the gain is fully recognized. If the exchange lacked commercial substance, no gain would be recognized.
On December 31, 2005, Vey Co. traded equipment with an original cost of $100,000 and accumulated depreciation of $40,000 for productive equipment with a fair value of $60,000.
In addition, Vey received $30,000 cash in connection with this exchange. There is commercial substance to the exchange. What should be Vey’s carrying amount for the equipment received at December 31, 2005?
When there is commercial substance to the exchange, the acquired asset is measured at fair value. In this case, the value is $60,000 as given in the problem. This amount also equals the fair value of assets given up in the exchange. The implied fair value of the asset exchanged is $60,000 + $30,000 cash received, or $90,000. The fair value of assets given up is therefore $90,000 less $30,000 cash received, or $60,000. The full journal entry for the exchange is: dr. plant asset 60,000; dr. accumulated depreciation, 40,000; debit cash 30,000; credit plant asset 100,000; credit gain, 30,000. The gain equals the difference between the fair value of the asset exchanged (90,000) and its book value (60,000).
Bensol Co. and Sable Co. exchanged similar trucks with fair values in excess of carrying amounts. In addition, Bensol paid Sable to compensate for the difference in truck values.
The exchange has commercial substance.
As a consequence of the exchange, Sable recognizes
A. A gain equal to the difference between the fair value and carrying amount of the truck given up.
B. A gain determined by the proportion of cash received to the total consideration.
C. A loss determined by the proportion of cash received to the total consideration.
D. Neither a gain nor a loss.
With commercial substance, the exchange is measured at fair value. The full gain is recognized and is equal to the difference between the fair value of the asset given up and its book value.
For example, assume the following values: new asset fair value 20, old asset fair value 26, cash received 6, old asset cost 30, old asset accumulated depreciation 9. The full entry is: dr. New Truck 20; dr. Accumulated Depreciation 9; dr. Cash 6; cr. Old Truck 30; cr. Gain 5.
The gain equals the old asset’s fair value of 26 and its book value of 21 (30 – 9).
olen Co. and Nolse Co. exchanged trucks with fair values in excess of carrying amounts. In addition, Solen paid Nolse to compensate for the difference in truck values.
The exchange lacks commercial substance.
As a consequence of the exchange, Solen recognizes
A. A gain equal to the difference between the fair value and carrying amount of the truck given up.
B. A gain determined by the proportion of cash paid to the total consideration.
C. A loss determined by the proportion of cash paid to the total consideration.
D. Neither a gain nor a loss.
Solen has an implied gain given that the fair value of its asset exceeds its book value. But when there is no commercial substance, such gains are recognized only when cash is received. Solen paid cash on the exchange.
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
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.
Campbell Corp. exchanged delivery trucks with Highway, Inc. Campbell’s truck originally cost $23,000, its accumulated depreciation was $20,000, and its fair value was $5,000. Highway’s truck originally cost $23,500, its accumulated depreciation was $19,900, and its fair value was $5,700. Campbell also paid Highway $700 in cash as part of the transaction. The transaction lacks commercial substance. What amount is the new book value for the truck Campbell received?
When a transaction lacks commercial substance and cash is paid, the new asset is recorded at the book value of the old asset plus any cash given. Campbell has the same economic position as before the exchange – a different truck used in the same manner and $700 less cash. The new truck is the BV of the old asset ($3,000) plus the cash paid ($700) or $3,700
Amble, Inc. exchanged a truck with a carrying amount of $12,000 and a fair value of $20,000 for a truck and $5,000 cash. The fair value of the truck received was $15,000.
At what amount should Amble record the truck received in the exchange assuming the exchange lacks commercial substance?
There is an implied gain of $8,000, the difference between the $20,000 fair value of the old asset and its $12,000 book value. Because the proportion of cash received is 25% ($5,000/$20,000), the entire gain is recognized and the acquired asset is recognized at fair value ($15,000).
In an exchange of plant assets, Transit Co. received equipment with a fair value equal to the carrying amount of equipment given up. Transit also contributed cash.
The exchange lacks commercial substance.
As a result of the exchange, Transit recognized
A. A loss equal to the cash given up.
B. A loss determined by the proportion of cash paid to the total transaction value.
C. A gain determined by the proportion of cash paid to the total transaction value.
D. Neither gain nor loss.
The fair value of the new asset equals the old asset’s book value. Because cash was paid, the fair value of the old asset is less than the fair value of the new asset.
Therefore, the fair value of the old asset is also less than the old asset’s book value resulting in a loss.
Using dollar amounts, assume the fair value of the new asset is $10. The book value of the old asset is also $10 by assumption. Assume Transit paid $2 cash.
Then the fair value of the old asset is $8 implying a loss of $2, the amount of cash paid. Even without commercial substance, losses are recognized in full
In a barter transaction where advertising services provided are exchanged for advertising services received, under which of the following situations can the advertising provider recognize revenue for the services performed? Assume the accounting is under IFRS guidelines.
A. When the advertising services in the exchange are similar
B. When the fair value of the advertising services received can be reliably measured
C. When there is a nonbarter transaction for similar advertising services that can be reliably measured with the same counterparty
D. When there is a nonbarter transaction for similar advertising services that can be reliably measured with a different counterparty
The fair value of the advertising services provided can be reliably measured by reference to a nonbarter transaction for similar advertising with a different counterparty (SIC Interpretation 31, para 5).
The required disclosures involve the following four sources of risk and uncertainty. Each is discussed in more detail later in this lesson.
1. Nature of the entity’s operations;
2. Use of estimates in financial statements;
3. Certain significant estimates;
4. Current vulnerability due to significant concentrations in certain aspects of operations.
The requirements apply only to those included in the standard and not to risks and uncertainties related to:
1. Management or key personnel;
2. Proposed changes in government regulations;
3. Proposed changes in accounting principles;
4. Deficiencies in internal control;
5. Possible effects of acts of God, war, sudden catastroph
Opto Co. is a publicly traded, consolidated enterprise reporting segment information. Which of the following items is a required enterprise-wide disclosure regarding external customers?The fact that transactions with a particular external customer constitute more than 10% of the total enterprise revenues
The identity of any external customer providing 10% or more of a particular operating segment’s revenue
The identity of any external customer considered to be “major” by management
Information on major customers is not required in segment reporting.
Correct! This is one of the disclosures required in FAS 131. The identity of the customer does not need to be disclosed, but the segment reporting the revenue must be identified. Such a segment would meet one of the three quantitative thresholds for reporting segment information. The three thresholds are 10% of revenue, income, and assets.
Which of the following types of entities are required to report on business segments?
A. Nonpublic business enterprises
B. Publicly traded enterprises
C. Not-for-profit enterprises
D. Joint ventures
FAS No. 131 requires that a public business enterprise report financial and descriptive information about its reportable operating segments.
Correy Corp. and its divisions are engaged solely in manufacturing operations. The following data (consistent with prior years’ data) pertain to the industries in which operations were conducted for the year ending December 31, 2005:
Industry Total revenue Operating profit Identifiable assets at 12/31/89
A$10,000,000 $1,750,000 $20,000,000
B 8,000,000 1,400,000 17,500,000
C 6,000,000 1,200,000 12,500,000
D 3,000,000 550,000 7,500,000
E 4,250,000 675,000 7,000,000
F 1,500,000 225,000 3,000,000
$32,750,000 $5,800,000 $67,500,000
In its segment information for 2005, how many reportable segments does Correy have?
Using the three quantitative thresholds (tests) from FAS 131 (Disclosures about Segments), the five following segments are reportable operating segments:
A, B, and C meet the test: Reported revenue, including external and internal, is 10% or more of the combined revenue of all reported operating segments. 10% of $32,750,000 is $3,275,000. The revenues of A, B, and C all exceed this amount.
D meets the test: Its assets (here $7,500,000 for D) are 10% or more of the combined assets of all operating segments (here $6,750,000 = .10 x $67,500,000).
E meets the test: The absolute amount of its reported profit or loss (here $675,000 for E) exceeds 10% of the greater, in absolute amount, of (1) the combined reported profit of all operating segments not reporting a loss (here $580,000 = .10 x $5,800,000) or (2) the combined reported loss of all operating segments that did report a loss (here $0).
F meets none of these tests.
Note: Some of the above segments meet more than one test. Only one needs to be met for a segment to be reportable.
The following information pertains to revenue earned by Timm Co.’s industry segments for the year ending December 31, 2005:
Segment Sales to unaffiliated customers Intersegment sales Total revenue
Alo $5,000 $3,000 $8,000
Bix 8,000 4,000 12,000
Cee 4,000 – 4,000
Dil 43,000 16,000 59,000
Combined 60,000 23,000 83,000
Elimination – (23,000) (23,000)
Consolidated $60,000 – $60,000
======== ======= =======
In conformity with the revenue test, Timm’s reportable segments were
To meet the revenue test, an operating segment must have total sales (including intersegment sales) of 10% or more of the combined segment sales (including intersegment sales). $83,000 is the test number.
Only Bix with $12,000 of total sales and Dil with $59,000 have sales in excess of $8,300 (.10 x $83,000).
Which of the following qualifies as a reportable operating segment?
A. Corporate headquarters, which oversees $1 billion in sales for the entire company
B. North American segment, whose assets are 12% of the company’s assets of all segments, and management reports to the chief operating officer
C. South American segment, whose results of operations are reported directly to the chief operating officer, and has 5% of the company’s assets, 9% of revenues, and 8% of the profits
D. Eastern Europe segment, which reports its results directly to the manager of the European division, and has 20% of the company’s assets, 12% of revenues, and 11% of profits
Only the North American segment meets at least one of the three quantitative criteria at the 10% level (revenue, income, assets) AND reports to the chief operating decision maker of the firm as a whole. For all three criteria, the segment must account for 10% or more of the combined amount for all operating segments. Reporting to the company-wide chief operating decision maker is also a requirement of an operating segment.
What information should a public company present about revenues from foreign operations?
A. Disclose separately the amount of sales to unaffiliated customers and the amount of intracompany sales between geographical areas.
B. Disclose as a combined amount sales to unaffiliated customers and intracompany sales between geographical areas.
C. Disclose separately the amount of sales to unaffiliated customers but not the amount of intracompany sales between geographical areas.
D. No disclosure of revenues from foreign operations needs to be reported.
Segment disclosure requires that companies disclose the amount of sales to unaffiliated customers by geographical region. They also require disclosure of intracompany sales between geographical areas. These cannot be aggregated but must be reported separately
During 2004, Pitt Corp. incurred costs to develop and produce a routine, low-risk computer software product as follows:
Completion of detailed program design $13,000
Costs incurred for coding and testing to establish technological feasibility 10,000
Other coding costs after establishment of technological feasibility 24,000
Other testing costs after establishment of technological feasibility 20,000
Costs of producing product masters for training materials 15,000
Duplication of computer software and training materials from product masters (1,000 units) 25,000
Packaging product (500 units) 9,000
In Pitt’s December 31, 2004 balance sheet, what amount should be reported in inventory?
Only the last two costs in the list are inventoried. The software development is complete when the product masters are produced.
The duplication costs ($25,000) and packaging costs ($9,000) are debited to inventory for a total of $34,000. These are costs necessary to bring the asset into salable condition. This cost is expensed when product is sold.
All the costs listed above the last two are aimed at developing the software. These costs are not debited to inventory. There is no product in which to inventory these costs until the development is complete.
Yellow Co. spent $12,000,000 during the current year developing its new software package. Of this amount, $4,000,000 was spent before it was at the application development stage and the package was only to be used internally. The package was completed during the year and is expected to have a 4-year useful life.
Yellow has a policy of taking a full-year’s amortization in the first year. After the development stage, $50,000 was spent on training employees to use the program.
What amount should Yellow report as an expense for the current year?
There are three expenses to be recognized:
(1) software development costs incurred before the application development stage was reached, $4,000,000;
(2) amortization of capitalized software development costs incurred after the application development stage was reached, $8,000,000/4 = $2,000,000;
(3) $50,000 training costs.
The sum of these is $6,050,000.
Training costs are expensed as incurred. The application development stage is the point after which there is sufficient evidence of a product that software development costs are capitalized and amortized. Such costs will benefit future periods.
n December 31, 2004, Byte Co. had capitalized software costs of $600,000 with an economic life of 4 years. Sales for 2005 were 10% of expected total sales of the software.
At December 31, 2005, the software had a net realizable value of $480,000.
In its December 31, 2005 balance sheet, what amount should Byte report as net capitalized cost of computer software?
1. The percentage of expected total revenues earned during the period multiplied by total capitalized amount, OR
2. Straight-line amortization based on expected life.
For reporting purposes, capitalized cost less accumulated amortization cannot exceed net realizable value. The calculation for Byte Co. for 2005 would be:
1. Percentage of expected total revenues = .10 x $600,000 =$ 60,000 amortization
2. Straight-line = 1 year/ 4years = .25 x $600,000 = $150,000 amortization
The greater is $150,000, the amount to amortize for 2005. For reporting purposes:
Capitalized cost = $600,000
Less: Amortization = 150,000
Net book value = $450,000 less than $480,000 net realizable value
Since amortized cost is less than net realizable value, no further write down is required and Byte would report net capitalized cost at $450,000.
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