FAR Mini Exam 2

When purchasing a bond, the present value of the bond 's expected net future cash inflows discounted at the market rate of interest provides what information about the bond?

a. yield

b. interest

c. price

d. par

c. price

Nu Corp. agreed to give Rand Co. a machine in full settlement of a note payable to Rand. The machine's original cost was $140,000. The note's face amount was $110,000. On the date of the agreement:

• The note's carrying amount was $105,000, and its present value was $96,000.

• The machine's carrying amount was $109,000, and its fair value was $96,000.

What amount of net gains (losses) should Nu recognize in its income statement?

a. $(9,000)

b. $0

c. $(4,000)

d. $(13,000)

c. $(4,000)

On January 2, Year 1, Union Co. purchased a machine for $264,000 and depreciated it by the straight-line method using an estimated useful life of eight years with no salvage value. On January 2, Year 4, Union determined that the machine had a useful life of six years from the date of acquisition and will have a salvage value of $24,000. An accounting change was made in Year 4 to reflect the additional data. The accumulated depreciation for this machine should have a balance at December 31, Year 4, of:

a. $154,000

b. $160,000

c. $176,000

d. $146,000

d. $146,000

Cott, Inc. prepared an interest amortization table for a five-year lease payable with a written purchase option of $2,000 which the lessee is reasonably certain to exercise. At the end of the five years, the balance in the leases payable column of the spreadsheet was zero. Cott has asked Grant, CPA, to review the spreadsheet to determine the error. Only one error was made on the spreadsheet. Which of the following statements represents the best explanation for this error?

a. Cott subtracted the annual interest amount from the lease payable balance instead of adding it

b. Cott discounted the annual payments as an ordinary annuity, when the payments actually occurred at the beginning of each period

c. the present value of the written purchase option was subtracted from the present value of the annual payments

d. the beginning present value of the lease did not include the present value of the written purchase option

d. the beginning present value of the lease did not include the present value of the written purchase option

On December 31, an entity analyzed equipment with a net carrying value of $250,000 for impairment. The entity determined the following:

Fair value	215,000
Undiscounted future cash flows	240,000

What is the impairment loss that will be reported on the December 31 income statement under U.S. GAAP?

a. $10,000

b. $0

c. $25,000

d. $35,000

d. $35,000

A material overstatement in ending inventory was discovered after the year-end financial statements of a company were issued to the public. What effect did this error have on the year-end financial statements?

		Current assets	Gross profit
	A.	Overstated	Understated
	B.	Understated	Overstated
	C.	Understated	Understated
	D.	Overstated	Overstated

d. overstated, overstated

On December 31, Year 1, Rice, Inc. authorized Graf to operate as a franchisee for an initial franchise fee of $150,000. Of this amount, $60,000 was received upon signing the agreement and the balance, represented by a note, is due in three annual payments of $30,000 each beginning December 31, Year 2. The present value on December 31, Year 1, of the three annual payments appropriately discounted is $72,000. According to the agreement, the nonrefundable down payment represents a fair measure of the services already performed by Rice; however, substantial future services are required of Rice. Collectibility of the note is reasonably certain. In Rice's December 31, Year 1, balance sheet, unearned franchise fees from Graf's franchise should be reported as:

a. $100,000

b. $132,000

c. $72,000

d. $90,000

c. $72,000

On January 1, Year 2, West Co. adopted the dollar-value LIFO inventory method. Inventory data for Year 2 and Year 3 are as follows:

Date	Inventory Current Year Cost	Relevant Price Index
1/1/Year 2	$250,000	1.00
12/31/Year 2	$278,250	1.05
12/31/Year 3	$364,000	1.12

West's dollar-value LIFO inventory under U.S. GAAP at December 31, Year 3 is:

a. $325,000

b. $364,000

c. $328,750

d. $332,950

d. $332,950

Emma Construction Company started building a new administrative headquarters on January 1, Year 1. Emma intends to occupy the building at the project completion date of January 1, Year 3. At December 31, Year 1, Emma had incurred $2,000,000 of construction costs, evenly spread during that first year. Projected remaining costs are $2,500,000. During Year 1, Emma incurred interest cost on specific construction debt in the amount of $40,000 and interest on other unrelated loans in the amount of $30,000. All loans carry 5% interest. How much interest should Emma capitalize for Year 1?

a. $0

b. $50,000

c. $40,000

d. $70,000

b. $50,000

On December 31, Year 1, an entity awaiting judgment on a lawsuit determined that a loss from the suit ranging between $1,000,000 and $2,000,000 was reasonably possible. On March 15, Year 2, after the entity issued its financial statements, the suit was settled. The settlement required the entity to pay damages of $1,400,000. What amount of contingent liability should the entity have reported on its December 31, Year 1 balance sheet?

a. $2,000,000

b.$1,000,000

c. $1,400,000

d. $0

d. $0

Bentley Company leased equipment from Babson Company for a six-year term beginning July 1, Year 1. The lease was appropriately accounted for as an operating lease. The rent for the first lease year is $8,000, and the rental charge for each of the remaining five years is $10,600. However, as an incentive to lease its equipment, Babson provided the first six months of the lease rent free. In its December 31, Year 1 income statement, what was Bentley's rental expense?

a. $9,500

b. $8,000

c. $4,000

d. $4,750

d. $4,750

Wall Co. sells a product under a two-year warranty. The estimated cost of warranty repairs is 2% of net sales. During Wall's first two years in business, it made the following sales and incurred the following warranty repair costs:

Year 1
Total sales	250,000
Total repair costs incurred	4,500
Year 2
Total sales	300,000
Total repair costs incurred	5,000

What amount should Wall report as warranty expense for Year 2?

a. $5,900

b. $1,000

c. $5,000

d. $6,000

d. $6,000

Liquid Industries defines cash and cash equivalents as cash and time certificates of deposit whose original maturity date is less than ninety days. When preparing their financial statements, Liquid Industries would most likely present this policy in the:

a. face of the statement of cash flows

b. supplemental schedule of non-cash investing and financing activities

c. summary of significant accounting polices

d. notes to the financial statements other than the summary of significant accounting policies

c. summary of significant accounting polices

On January 1, Year 1, David Corp. issued 1000 of its $1,000 bonds at 94. David Corp. uses U.S. GAAP. The bonds mature in 10 years but are callable at 102 any time after issuance. On January 1, Year 1, David incurred bond issue costs of $50,000. On July 1, Year 8, David called all of the bonds and retired them. Assuming that bond discount and issue costs were amortized using the straight-line method, what amount of pretax loss would David report from this extinguishment of debt?

a. $85,000

b. $47,500

c. $58,500

d. $20,000

b. $47,500

On December 31, Year 1, Day Co. leased a new machine from Parr with the following pertinent information:

Lease term		6 years
Annual lease payment beginning December 31, Year 1		50,000
Useful life of machine		8 years
Day's incremental borrowing rate		15%
Implicit interest rate in lease (known by Day)		12%
Present value of an annuity of 1 in advance for 6 periods at:
	12%	4.61
	15%	4.35

Day Co. uses U.S. GAAP for its financial reporting method. The lease is not renewable, and the machine reverts to Parr at the termination of the lease. The cost of the machine on Parr's accounting records is $375,000. At the beginning of the lease term, Day should record a lease liability of:

a. $0

b. $217,500

c. $180,500

d. $375,000

c. $180,500

Which of the following choices is least likely to represent an actual debt covenant?

a. the debt-to-equity ratio must stay below a specific level

b. collateral cannot fall below a specific amount

c. working capital levels cannot fall below a specific amount

d. times interest earned must stay below a specific level

d. times interest earned must stay below a specific level

On July 1, Year 1, Black & Associates issued 2,000 of its 8%, $1,000 bonds for $1,752,000. The bonds were issued to yield 10%. The bonds are dated July 1, Year 1 and mature on July 1, Year 11. Interest is payable semiannually on January 1st and July 1st. Using the effective interest method, how much of the bond discount should be amortized for the six months ended December 31, Year 1?

a. $9,920

b. $12,400

c. $15,200

d. $7,600

d. $7,600