FAR mini exam 3

Quinn Co. reported a net deferred tax asset of $9,000 in its December 31, Year 1, balance sheet. For Year 2, Quinn reported pretax financial statement income of $300,000. Temporary differences of $100,000 resulted in taxable income of $200,000 for Year 2. At December 31, Year 2, Quinn had cumulative taxable differences of $70,000. Quinn's effective income tax rate is 30%. In its December 31, Year 2, income statement, what should Quinn report as deferred income tax expense?

a. $60,000

b. $21,000

c. $12,000

d. $30,000

d. $30,000

Select the description below which best describes a characteristic of the modified accrual accounting method used for government entities including the general fund.

a. governmental fund revenues are recorded on the acrrual basis if they are measurable

b. expenditures for capital items are always depreciated

c. receivables are recorded net of credit loss expense under the modified accrual accounting

d. emphasis is on flow of current financial resources, which is very close to cash flow

d. emphasis is on flow of current financial resources, which is very close to cash flow

How should a nongovernmental, not-for-profit organization report donor-restricted cash contributions for long-term-purposes in its statement of cash flows?

a. financing activity inflow

b. as a noncash transaction

c. investing activity inflow

d. operating activity inflow

a. financing activity inflow

On December 31, Year 4, Prone Inc. sold a piece of equipment to its 90 percent owned subsidiary, Supine Co. Details are as follows:

Original purchase date	January 1, Year 1
Original cost to Prone	$65,000
Original estimate of salvage value	$10,000
Original estimate of economic life	5 years
Intercompany selling price	$60,000

Both companies use straight-line depreciation. Both companies think that, as of the end of Year 4, the equipment's remaining useful life will be four years and the salvage value will become zero.

In preparing its Year 5 consolidated financial statements, consolidated depreciation expense will be reduced by:

a. $8,775

b. $7,800

c. $9,750

d. $7,020

c. $9,750

In Year 4, a nongovernmental, not-for-profit school began a campaign to raise funds for a proposed capital addition. The following information is available as of June 30, Year 4:

Information	Amount
Received on February 1, Year 4: cash contributions from parents and alumni	$450,000
Received on February 1, Year 4: unconditional promises to give, of which $300,000 was received as of June 30, Year 4	600,000
Received on March 1, Year 4: a promise from a Year 1 alumnus to give $50,000 if other Year 1 alumni give a total of $50,000 before September 30, Year 5	50,000
Received on June 30, Year 4: cash contributions from Year 1 alumni in response to March 1, Year 4, alumni challenge	20,000

What amount of contributions for this campaign should the school report in its June 30, Year 4, statement of activities?

a. $1,090,000

b. $1,070,000

c. $770,000

d. $1,050,000

b. $1,070,000

A publicly traded corporation reported a $10,000 deduction in its current year tax return for an item it expects to be disallowed. The tax rate is 40 percent. How should the corporation report this tax position in the financial statements?

a. as a $4,000 deferred tax asset and a $4,000 income tax benefit

b. as a $4,000 income tax expense and a $4,000 liability for an unrecognized tax benefit

c. as a $10,000 deferred tax asset

d. as a temporary difference disclosed in the notes to the financial statements that is not recognized

b. as a $4,000 income tax expense and a $4,000 liability for an unrecognized tax benefit

The Jones family lost its home in a fire. On December 25, Year 1, a philanthropist sent money to the Amer Benevolent Society, a private not-for-profit organization, to purchase furniture for the Jones family. During January Year 2, Amer purchased this furniture for the Jones family. How should Amer report the receipt of the money in its Year 1 financial statements?

a. as a liability

b. as an increase to board-designated net assets (for future expenditures)

c. as a contribution with donor restrictions

d. as a contribution without donor restrictions

a. as a liability

On December 31, Year 4, Prone, Inc. sold a piece of equipment to it's 90% owned subsidiary, Supine Co. Details are as follows:

Original purchase date	January 1, Year 1
Original cost to Prone	$65,000
Original estimate of salvage value	$10,000
Original estimate of economic life	5 years
Intercompany selling price	$60,000
Supine's estimate of remaining economic life	4 years
Supine's estimate of salvage value	$5,000

Both companies use straight-line depreciation

In preparing its consolidated financial statements for Year 4, how much intercompany gain will Prone have to eliminate?

a. $39,000

b. $49,000

c. $35,100

d. $31,590

a. $39,000

Pinellas Company owns 30% of the voting common stock of Sanibel Company. Pinellas will probably use the equity method of accounting to account for this investment because:

a. no other shareholder holds more than a 29% interest in Sanibel Co.

b. pinellas is assumed to be able to exercise significant influence over the affairs of Sanibel Co.

c. pinellas receives 30% of dividends paid by Sanibel Co.

d. pinellas will be able to appoint 30% of the directors of Sanibel Co.

b. pinellas is assumed to be able to exercise significant influence over the affairs of Sanibel Co.

Neely Co. disclosed in the notes to its financial statements that a significant number of its unsecured trade account receivables are with companies that operate in the same industry. This disclosure is required to inform financial statement users of the existence of:

a. concentration of market risk

b. concentration of credit risk

c. risk of measurement uncertainty

d. off-balance sheet risk of accounting loss

b. concentration of credit risk

Give the World a Puppy Foundation is organized as a not-for-profit organization with the mission of ensuring that everyone on the planet owns a puppy. A local veterinarian has volunteered her time to provide medical care to the puppies in the care of the foundation. The Foundation estimates that it would pay $40,000 per year for this service if it were not donated. The Foundation also enjoys the services of 20 volunteers who walk and otherwise attend to the animals. The Foundation estimates the value of the services provided at $25,000 per year that would be handled by current salaried staff without these donated hours. As a result of these donations Give the World a Puppy would record:

a. $25,000 in revenue without donor restrictions and $40,000 in revenue with donor restrictions

b. $40,000 in revenue without donor restrictions

c. $25,000 in revenue without donor restrictions

d. $65,000 in revenue without donor restrictions

b. $40,000 in revenue without donor restrictions

Midtown Church received a donation of marketable equity securities from a church member. The securities had appreciated in value after they were purchased by the donor, and they continued to appreciate through the end of Midtown's fiscal year. At what amount should Midtown report its investment in marketable equity securities in its year-end balance sheet?

a. market value at the balance sheet date

b. market value at the date of receipt

c. market value at either the date of receipt or the balance-sheet date

d. donor’s cost

a. market value at the balance sheet date

The following data pertains to Tyne Co.'s investment in marketable debt securities:

Classification	Cost	Fair Value 12/31/Year 2	Fair Value 12/31/Year 1
Trading	150,000	155,000	100,000
Available-for-sale	150,000	130,000	120,000

If the present value of expected cash flows for the available-for-sale security is equal to amortized cost, what amount should Tyne report as unrealized holding gain in its Year 2 income statement?

a. $65,000

b. $50,000

c. $55,000

d. $80,000

c. $55,000

Which of the following statements is not required of not-for-profit organizations?

a. statement of retained earnings

b. statement of activities

c. statement of cash flows

d. statement of financial position

a. statement of retained earnings

On January 2 of the current year, Otto Co. purchased 40% of Penn Co.'s outstanding common stock. The carrying amount of Penn's depreciable assets was $1,000,000 on January 2. Penn's depreciable assets had an original useful life of 10 years, and a remaining useful life of five years. Otto recognized $8,000 amortization for the current year ending December 31 related to its investment in Penn due to the excess of fair value over book value on these assets. What was the fair value of Penn's depreciable assets on January 2 of the current year?

a. $1,000,000

b. $1,100,000

c. $100,000

d. $900,000

b. $1,100,000

Which of the following types of agreement represents a split-interest arrangement?

a. charitable remainder trust

b. a perpetual trust naming ABC as sole beneficiary

c. a direct gift to ABC to be made by the donor next year

d. a direct bequest to ABC in the donor’s will

a. charitable remainder trust