FAR simulated exam 2

Finch Co. reported a total asset retirement obligation of $257,000 in last year's financial statements. This year, Finch acquired assets subject to unconditional retirement obligations measured at undiscounted cash flow estimates of $110,000 and discounted cash flow estimates of $68,000. Finch paid $87,000 toward the settlement of previously recorded asset retirement obligations and recorded an accretion expense of $26,000. What amount should Finch report for the asset retirement obligation in this year's balance sheet?

a. $238,000

b. $280,000

c. $306,000

d. $264,000

d. $264,000

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, less a 10% service fee, is credited to the mortgagee's account and used to reduce future escrow payments. Additional information from the current year follows:

Escrow accounts liability, January 1	700,000
Escrow payments received	1,580,000
Real estate taxes paid	1,720,000
Interest on escrow funds	50,000

What amount should Kent report as escrow accounts liability in its December 31 balance sheet?

a. $610,000

b. $605,000

c. $515,000

d. $510,000

b. $605,000

At the beginning of the fiscal year, End Corp. purchased 25% of Turf Co. for $550,000. At the end of the fiscal year, Turf reported net income of $65,000 and declared and paid cash dividends of $30,000. End uses the equity method of accounting. At year-end, what amount should End report in its balance sheet for the investment in Turf?

a. $558,750

b. $550,000

c. $573,750

d. $566,250

a. $558,750

House Publishers offered a contest in which the winner would receive $1,000,000, payable over 20 years. On December 31, Year 1, House announced the winner of the contest and signed a note payable to the winner for $1,000,000, payable in $50,000 installments every January 2. Also on December 31, Year 1, House purchased an annuity for $418,250 to provide the $950,000 prize monies remaining after the first $50,000 installment, which was paid on January 2, Year 2.

In its Year 1 income statement, what should House report as contest prize expense?

a. $468,250

b. $0

c. $418,250

d. $1,000,000

a. $468,250

Which of the following assets are financial instruments?

		Investment in bonds	Prepaid expenses
	A.	Yes	Yes
	B.	Yes	No
	C.	No	Yes
	D.	No	No

b. yes, no

Brite Corp. had the following liabilities at December 31, Year 1:

Accounts payable	55,000
Unsecured notes, 8%, due July 1, Year 2	400,000
Accrued expenses	35,000
Contingent liability	450,000
Deferred income tax liability	25,000
Senior bonds, 7%, due March 31, Year 2	1,000,000

The contingent liability is an accrual for possible losses on a $1,000,000 lawsuit filed against Brite. Brite's legal counsel expects the suit to be settled in Year 3, and has estimated that Brite will be liable for damages in the range of $450,000 to $750,000.

The deferred income tax liability is not related to an asset or liability for financial reporting and is expected to reverse in Year 3.

What amount should Brite report in its December 31, Year 1, balance sheet for current liabilities?

a. $1,515,000

b. $1,490,000

c. $940,000

d. $515,000

b. $1,490,000

On January 1, an entity issues 50,000 shares of $10 par value common stock for $18 per share. On October 1, the entity repurchased 15,000 of the above shares at $17 per share. Assuming that the company reissued all of the repurchased shares at $23 per share on December 31, what is the net balance in the additional paid-in capital—common stock account on December 31 if the par value (legal) method is used for the above stock transactions?

a. $595,000

b. $475,000

c. $280,000

d. $400,000

b. $475,000

On March 15, Year 1, Krol Co. paid property taxes of $90,000 on its office building for the calendar year. On April 1, Year 1, Krol paid $150,000 for unanticipated repairs to its office equipment. The repairs will benefit operations for the remainder of Year 1. What is the total amount of these expenses that Krol should include in its quarterly income statement for the three months ended June 30, Year 1?

a. $37,500

b. $97,500

c. $72,500

d. $172,500

c. $72,500

The following data have been extracted from the financial statements of Hutton Inc.

	12/31/Year 2	12/31/Year 1
Current assets:
Cash and cash equivalents	100,000	80,000
Marketable securities (at fair value)	110,000	140,000
Accounts receivable	700,000	600,000
Inventory (at lower of cost or market)	350,000	425,000
Total current assets	1,260,000	1,245,000
Sales (net)	3,000,000	2,600,000
Cost of goods sold	(2,000,000)	(1,700,000)
Gross profit	1,000,000	900,000
Operating expenses	(450,000)	(400,000)
Interest expense	(50,000)	(60,000)
Net income before income taxes	500,000	440,000
Income taxes (30 percent)	(150,000)	(132,000)
Net income after income taxes	350,000	308,000

What was Hutton Inc.'s days sales in accounts receivable for Year 2?

a. 1,686.3 days

b. 79.0 days

c. 85.2 days

d. 84.1 days

c. 85.2 days

Toddler Care Co. offers three payment plans on its 12-month contracts. Information on the three plans and the number of children enrolled in each plan for the September 1, Year 1, through August 31, Year 2, contract year follows:

Plan	Initial payment per child	Monthly fees per child	Number of children
#1	$500	$-	15
#2	200	30	12
#3	-	50	9
			36

Toddler received $9,900 of initial payments on September 1, Year 1, and $3,240 of monthly fees during the period September 1 through December 31, Year 1. In its December 31, Year 1, balance sheet, what amount should Toddler report as deferred revenues?

a. $9,900

b. $4,380

c. $6,600

d. $3,300

c. $6,600

Milton Co. pledged some of its accounts receivable to Good Neighbor Financing Corporation in return for a loan. Which of the following statements is correct?

a. good neighbor financing will take title to the receivables, and will return title to Milton after the loan is paid

b. milton will retain control of the receivables

c. good neighbor financing will assume the responsibility of collecting the receivables

d. good neighbor financing cannot take title to the receivables if Milton does not repay the loan. title can only be taken if the receivables are factored

b. milton will retain control of the receivables

On September 1, Year 1, Hyde Corp., a newly-formed company, had the following stock issued and outstanding:

• Common stock, no par, $1 stated value, 5,000 shares originally issued for $15 per share.

• Preferred stock, $10 par value, 1,500 shares originally issued for $25 per share.

Hyde's September 1, Year 1, statement of stockholders' equity should report:

		Common stock	Preferred stock	Additional paid-in capital
	A.	$5,000	$15,000	$92,500
	B.	$5,000	$37,500	$70,000
	C.	$75,000	$37,500	$0
	D.	$75,000	$15,000	$22,500

a. 5,000, 15,000, 92,500

Tulip Co. owns 100% of Daisy Co.'s outstanding common stock. Tulip's cost of goods sold for the year totals $600,000 and Daisy's cost of goods sold totals $400,000. During the year, Tulip sold inventory costing $60,000 to Daisy for $100,000. By the end of the year, all transferred inventory was sold to third parties. What amount should be reported as cost of goods sold in the consolidated statement of income?

a. $940,000

b. $900,000

c. $960,000

d. $1,000,000

b. $900,000

The December 31, Year 1, financial statements of Frank Corp. were first available to be issued and were, in fact, actually issued on February 23, Year 2. The financial statements were then reissued on March 18, Year 2, to reflect the recognition of a subsequent event that occurred on January 9, Year 2. Which of the following events would require recognition by Frank Corp. through a second reissuance of the December 31, Year 1, financial statements?

a. the bankruptcy on February 15, Year 2, of a major customer that owed a significant amount to Frank Corp

b. the destruction of its only manufacturing facility by fire on March 17, Year 2

c. the initiation of a lawsuit on February 28, Year 2, as a result of an accident that occurred in Frank’s factory on January 9, Year 2

d. the settlement of a lawsuit on March 7, Year 2, for substantially less than the amount of liability recorded for it on the December 31, Year 1, balance sheet as originally issued

a. the bankruptcy on February 15, Year 2, of a major customer that owed a significant amount to Frank Corp

A voluntary health and welfare organization received a $700,000 endowment with donor restrictions in perpetuity during the year. The donor stipulated that the income and investment appreciation be used to maintain its senior center. The endowment fund reported a net investment appreciation of $80,000 and investment income of $50,000. The organization spent $60,000 to maintain its senior center during the year. What amount of change in net assets with donor restrictions should the organization report?

a. $770,000

b. $130,000

c. $70,000

d. $50,000

a. $770,000

In hospital accounting, restricted funds are:

a. restricted as to use only for board-designated purposes

b. restricted as to use by the donor, grantor, or other source of the resources

c. not available unless the board of directors remove the restrictions

d. not available for current operating use; however, the income generated by the funds is available for current operating use

b. restricted as to use by the donor, grantor, or other source of the resources

Beck Corp. issued 200,000 shares of common stock when it began operations in Year 1 and issued an additional 100,000 shares in Year 2. Beck also issued preferred stock convertible to 100,000 shares of common stock. In Year 3, Beck purchased 75,000 shares of its common stock and held it in Treasury. At December 31, Year 3, how many shares of Beck's common stock were outstanding?

a. 325,000

b. 225,000

c. 300,000

d. 400,000

b. 225,000

Which of the following must be present in order to require the disclosure of the estimated effect of a change in an estimate used in the preparation of financial statements?

I. it is reasonably possible that the estimate will change in the near term

II. the effect of a change in the estimate would be material

III. the actual result is different from the estimate

a. II and III

b. II only

c. I only

d. I and II

d. I and II

For a finance lease, the amount recorded initially by the lessee as a liability should normally:

a. exceed the present value of the minimum lease payments at the beginning of the lease

b. equal the present value of the minimum lease payments at the beginning of the lease

c. equal the total of the minimum lease payments

d. exceed the total of the minimum lease payments

b. equal the present value of the minimum lease payments at the beginning of the lease

For which of the following methods of determining fair value would an entity's discount rate be most important?

a. highest and best value approach

b. income approach

c. cost approach

d. market approach

b. income approach

Troop Co. frequently borrows from the bank to maintain sufficient operating cash. The following loans were at a 12 percent interest rate, with interest payable at maturity. Troop repaid each loan on its scheduled maturity date.

Date of Loan	Amount	Maturity Date	Term of Loan
11/1/Year 1	$10,000	10/31/ Year 2	1 year
2/1/ Year 2	30,000	7/31/ Year 2	6 months
5/1/ Year 2	16,000	1/31/ Year 3	9 months

Troop records interest expense when the loans are repaid. Accordingly, interest expense of $3,000 was recorded in Year 2. If no correction is made, by what amount would Year 2 interest expense be understated?

a. $1,440

b. $1,280

c. $1,240

d. $1,080

d. $1,080

How are discontinued operations that occur at midyear initially reported?

a. included in net income and disclosed in the notes to interim financial statements

b. disclosed only in the notes to interim financial statements

c. included in net income and disclosed in the notes to the year-end financial statements

d. disclosed only in the notes to the year-end financial statements

a. included in net income and disclosed in the notes to interim financial statements

Douglas Co. leased machinery with an economic useful life of six years. For tax purposes, the depreciable life is seven years. The lease is for five years, and although Douglas can purchase the machinery at fair value at the end of the lease, they are unlikely to exercise this option. What is the amortization period of the ROU asset for the leased machinery for financial reporting purposes?

a. seven years

b. five years

c. zero

d. six years

b. five years

A company receives an advance payment for special order goods that are to be manufactured and delivered within six months. The advance payment should be reported in the company's balance sheet as a:

a. deferred charge

b. current liability

c. noncurrent liability

d. contra asset account

b. current liability

On January 2 of the current year, LTTI Co. entered into a three-year, noncancelable contract to buy up to 1 million units of a product each year at $0.10 per unit with a minimum annual guarantee purchase of 200,000 units. At year-end, LTTI had purchased only 80,000 units and decided to cancel sales of the product. What amount should LTTI report as a loss related to the purchase commitment as of December 31 of the current year?

a. $12,000

b. $8,000

c. $0

d. $52,000

d. $52,000

In November and December Year 1, Dorr Co., a newly organized magazine publisher, received $72,000 for 1,000 three-year subscriptions at $24 per year, starting with the January Year 2 issue. Dorr elected to include the entire $72,000 in its Year 1 income tax return. What amount should Dorr report in its Year 1 income statement for subscriptions revenue?

a. $4,000

b. $0

c. $72,000

d. $24,000

b. $0

United Together, a labor union, had the following revenues and expenses for the year ended December 31, Year 1:

Receipts:
Per capita dues	$680,000
Initiation fees	90,000
Sales of organizational supplies	60,000
Nonexpendable gift restricted by donor for loan purposes for 10 years	30,000
Nonexpendable gift restricted by donor for loan purposes in perpetuity	25,000
Expenses:
Labor negotiations	$500,000
Fundraising	100,000
Membership development	50,000
Administrative and general	200,000

Additional information:

The union's constitution provides that 10% of the per capita dues are designated for the Strike Insurance Fund to be distributed for strike relief at the discretion of the union's executive board.

In United Together's statement of activity for the year ended December 31, Year 1, what amount should be reported under the classification of contributions—with donor restrictions?

a. $25,000

b. $0

c. $55,000

d. $30,000

c. $55,000

Rabb Co. records its purchases at gross amounts but wishes to change to recording purchases net of purchase discounts. Discounts available on purchases recorded from October 1, Year 1, to September 30, Year 2, totaled $2,000. Of this amount, $200 is still available in the accounts payable balance. The balances in Rabb's accounts as of and for the year ended September 30, Year 2, before conversion are:

Purchases	100,000
Purchase discounts taken	800
Accounts payable	30,000

What is Rabb's accounts payable balance as of September 30, Year 2, after the conversion?

a. $28,200

b. $28,800

c. $29,200

d. $29,800

d. $29,800

Hy Corp. bought Patent A for $40,000 and Patent B for $60,000. Hy also paid acquisition costs of $5,000 for Patent A and $7,000 for Patent B. Both patents were challenged in legal actions. Hy paid $20,000 in legal fees for a successful defense of Patent A and $30,000 in legal fees for an unsuccessful defense of Patent B. What amount should Hy capitalize for patents?

a. $112,000

b. $65,000

c. $45,000

d. $162,000

b. $65,000

On December 1, East Co. purchased a tract of land as a factory site for $300,000. The old building on the property was razed, and salvaged materials resulting from demolition were sold. Additional costs incurred and salvage proceeds realized during December were as follows:

Cost to raze old building	25,000
Legal fees for purchase contract and to record ownership	5,000
Title guarantee insurance	6,000
Proceeds from sale of salvaged materials	4,000

In East's December 31 balance sheet, what amount should be reported as land?

a. $321,000

b. $332,000

c. $311,000

d. $336,000

b. $332,000

For the year ended December 31, Year 3, Grim Co.'s pretax financial statement income was $200,000 and its taxable income was $150,000. The difference is due to the following:

Interest on municipal bonds	70,000
Premium expense on keyman life insurance	(20,000)
Total	50,000

Grim's enacted income tax rate is 30%. In its Year 3 income statement, what amount should Grim report as current provision for income tax expense?

a. $66,000

b. $51,000

c. $60,000

d. $45,000

d. $45,000

Which of the following should be reported as a prior period adjustment?

		Change in estimated lives of depreciable assets	Change from unaccepted principle to accepted principle
	A.	Yes	No
	B.	Yes	Yes
	C.	No	Yes
	D.	No	No

c. no, yes

Based on the stock transactions below, what is the weighted average number of shares outstanding as of December 31, Year 1, which should be used in the calculation of basic earnings per share in financial statements issued on March 1, Year 2?

Date	Transactions
January 1, Year 1	Beginning balance 100,000
April 1, Year 1	Issued 30,000 shares for cash
June 1, Year 1	50% stock dividend
February 15, Year 2	2-for-1 stock split
March 15, Year 2	Issued 40,000 shares for cash

a. 367,500

b. 147,500

c. 295,000

d. 183,750

a. 367,500

Tara Co. owns an office building and leases the offices under a variety of rental agreements involving rent paid in advance monthly or annually. Not all tenants make timely payments of their rent. Tara's balance sheets contained the following data:

	Year 1	Year 2
Rent Receivable	9,600	12,400
Unearned Rent	32,000	24,000

During Year 2, Tara received $80,000 cash from tenants. What amount of rental revenue should Tara record for Year 2?

a. $74,800

b. $69,200

c. $90,800

d. $85,200

c. $90,800

The Cats and Dogs League was organized as a nongovernmental not-for-profit organization. The League received a pledge of $10,000 to be used to build an addition to the kennel. This donation will not be received for three years. How should this pledge be recorded?

a. as supported with donor restrictions of $10,000

b. as a conditional promise to give of $10,000

c. it should not be accounted for until it is received

d. as support with donor restrictions of the present value of $10,000

d. as support with donor restrictions of the present value of $10,000

The League, a not-for-profit organization, received the following pledges:

Without donor restrictions	$200,000
With donor restrictions for capital additions	150,000

All pledges are legally enforceable; however, the League's experience indicates that 10 percent of all pledges prove to be uncollectible. What amount should the League report as pledges receivable, net of any required allowance account?

a. $135,000

b. $180,000

c. $350,000

d. $315,000

d. $315,000

The following is Gold Corp.'s June 30 trial balance:

Cash overdraft		10,000
Accounts receivable, net	35,000
Inventory	58,000
Prepaid expenses	12,000
Land held for resale	100,000
Property, plant, and equipment, net	95,000
Accounts payable and accrued expenses		32,000
Common stock		25,000
Additional paid-in capital		150,000
Retained earnings		83,000
	300,000	300,000

Additional Information:

• Checks amounting to $30,000 were written to vendors and recorded on June 29, resulting in a cash overdraft of $10,000. The checks were mailed on July 9.

• Land held for resale was sold for cash on July 15.

• Gold issued its financial statements on July 31.

In its June 30 balance sheet, what amount should Gold report as current assets?

a. $195,000

b. $205,000

c. $125,000

d. $225,000

d. $225,000

A large not-for-profit organization's statement of activities should report the net change for net assets that are:

		Without Donor Restrictions	With Donor Restrictions
	A.	No	Yes
	B.	Yes	Yes
	C.	No	No
	D.	Yes	No

b. yes, yes

A retail store sold gift certificates that are redeemable in merchandise. The gift certificates lapse one year after they are issued. How would the deferred revenue account be affected by each of the following?

		Redemption of certificates	Lapse of certificates
	A.	No effect	No effect
	B.	Decrease	Decrease
	C.	Decrease	No effect
	D.	No effect	Decrease

b. decrease, decrease

Because Jab Co. uses different methods to depreciate equipment for financial statement and income tax purposes, Jab has temporary differences that will reverse during the next year and add to taxable income. Under U.S. GAAP, deferred income taxes that are based on these temporary differences should be classified in Jab's balance sheet as a:

a. contra-account to non-current assets

b. contra-account to current assets

c. non-current liability

d. current liability

c. non-current liability

Alton Co. had a cash balance of $32,300 recorded in its general ledger at the end of the month, prior to receiving its bank statement. Reconciliation of the bank statement reveals the following information:

Bank service charge: $15 Check deposited and returned for insufficient funds check: $120 Deposit recorded in the general ledger as $258 but should be $285 Checks outstanding: $1,800

After reconciling its bank statement, what amount should Alton report as its cash account balance?

a. $32,192

b. $32,138

c. $30,338

d. $30,392

a. $32,192

Abbott Co. is preparing its statement of cash flows for the year. Abbott's cash disbursements during the year included the following:

Payment of interest on bonds payable	$500,000
Payment of dividends to stockholders	300,000
Payment to acquire 1,000 shares of Marks Co. common stock	100,000

What should Abbott report as total cash outflows for financing activities in its statement of cash flows under U.S. GAAP?

a. $0

b. $900,000

c. $800,000

d. $300,000

d. $300,000

Dunbarn Co. had the following activities during the year:

Purchase of inventory	120,000
Purchase of equipment	80,000
Purchase of available-for-sale securities	60,000
Purchase of treasury stock	70,000
Issuance of common stock	150,000

What amount should Dunbarn report as cash provided (used) by investing activities in its statement of cash flows for the year?

a. ($140,000)

b. ($210,000)

c. ($120,000)

d. $150,000

a. ($140,000)

On January 2, Year 1, Marx Co. as lessee signed a five-year noncancelable equipment lease with annual payments of $200,000 beginning December 31, Year 1. Marx treated this transaction as a finance lease. The five lease payments have a present value of $758,000 at January 2, Year 1, based on interest of 10%. What amount should Marx report as interest expense for the year ended December 31, Year 1?

a. $55,800

b. $0

c. $75,800

d. $48,400

c. $75,800

The following stock dividends were declared and distributed by Sol Corp.:

Percentage of common shares outstanding at declaration date	Fair value	Par value
10	$15,000	$10,000
28	40,000	30,800

What aggregate amount should be debited to retained earnings for these stock dividends?

a. $40,800

b. $55,000

c. $45,800

d. $50,000

c. $45,800

Dana Co.'s officers' compensation expense account had a balance of $224,000 at December 31, before any appropriate year-end adjustment relating to the following:

• No salary accrual was made for December 30-31. Salaries for the two-day period totaled $3,500.

• Year-end officers' bonuses of $62,500 were paid on January 31.

In its December 31 income statement, what amount should Dana report as officers' compensation expense?

a. $224,000

b. $290,000

c. $286,500

d. $227,500

b. $290,000

An asset group is being evaluated for an impairment loss. The following financial information is available for the asset group:

Carrying value	100,000,000
Sum of the undiscounted cash flows	95,000,000
Fair value	80,000,000

What amount of impairment loss, if any, should be recognized?

a. $5,000,000

b. $20,000,000

c. $15,000,000

d. $0

b. $20,000,000

The following information was taken from the income statement of Hadley Co.:

Beginning inventory	17,000
Purchases	56,000
Ending inventory	13,000

What is Hadley Co.'s inventory turnover?

a. 3

b. 6

c. 5

d. 4

d. 4

On January 1, Read, a nongovernmental not-for-profit organization, received $20,000 and an unconditional pledge of $20,000 for each of the next four calendar years to be paid on the first day of each year. The present value of an ordinary annuity for four years at a constant interest rate of 8 percent is 3.312. What amount of net assets with donor restrictions is reported in the year the pledge was received?

a. $66,240

b. $80,000

c. $86,240

d. $100,000

a. $66,240

Due to a decline in market price in the second quarter, Petal Co. incurred an inventory loss. The market price is expected to return to previous levels by the end of the year. At the end of the year the decline had not reversed. When should the loss be reported in Petal's interim income statements?

a. ratably over the second, third, and fourth quarters

b. ratably over the third and fourth quarters

c. in the second quarter only

d. in the fourth quarter only

d. in the fourth quarter only