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Financial Accounting & Reporting Updating Supplement Version 41.2

Copyright @ 2012 by Bisk Education, Inc. All rights reserved. Page 1 of 35

FINANCIAL ACCOUNTING & REPORTING

CPA2901US2-41

TABLE OF CONTENTS

About Updating Supplement Version 41.2 .................................................................................................... 2

Study Options Available to Candidates ......................................................................................................... 2

HotSpot: IFRS & SEC Reporting ................................................................................................................ 2

Other Sources of Information for Candidates ............................................................................................... 2

Recent FASB Pronouncements .................................................................................................................... 3

Recent GASB Pronouncements ................................................................................................................... 6

Errata ............................................................................................................................................................. 8

Recently Released AICPA Questions ......................................................................................................... 10 We wish to thank the American Institute of Certified Public Accountants and the Financial Accounting Standards Board for permission to reprint the following copyright materials:

1. Uniform CPA Examination Questions and Unofficial Answers, Copyright American Institute of Certified Public Accountants, Inc., Harborside Financial Center, 201 Plaza Three, Jersey City, NJ 07311-3881

2. Accounting Research Bulletins, APB Opinions, APB Statements, and Code of Professional Conduct.

3. FASB Statements, Interpretations, and Statements of Financial Accounting Concepts (SFAC), Copyright Financial Accounting Standards Board, 401 Merritt 7, P.O. Box 5116, Norwalk, CT 06856, U.S.A. Reprinted with permission. Copies of the complete documents are available from the FASB.

4. GASB Statements, Interpretations, and Technical Bulletins, Copyright Governmental Accounting Standards Board, 401 Merritt 7, P.O. Box 5116, Norwalk CT 06856-5116.

5. Statements on Auditing Standards (SAS), Statements on Standards for Accounting and Review Services (SSARS), Statements on Standards for Accountants Services on Prospective Financial Information, Statements on Standards for Attestation Engagements (SSAE), and Statements on Quality Control Standards (SQCS).

6. ISB Standards, Copyright Independence Standards Board, 6th Floor, 1211 Avenue of the Americas, New York, NY 10036-8775

Copyright 2012 by Bisk Education, Inc. Tampa, FL 33631-3028 All rights reserved. Reproduction in any form is expressly prohibited. Printed in the United States of America.

This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought.From a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations.



About Updating Supplement Version 41.2

Information that is only six months old is eligible to be tested on the CPA exam. Updating Supplement Version 41.2 is designed to bring the latest release of material to candidates using our products to pre-pare for the CPA exam in the Jul-Aug 2012 window. Candidates with the 41st edition and corresponding software (versions 14.3, 14.4, 14.5, and 14.6) will find the information in this supplement more than adequate for these exam windows.

When new information first becomes available, the examiners tend to test new or changed portions of concepts lightly. Coverage of information after that point may increase, if it is in a heavily tested area. Do not fall into the trap of attaching undue significance to new information merely because it is new.

Remember, with the information and techniques in our material, passing the exam is an attainable goal. Adhere to a reasonable study planand pass the first time!

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Study Options Available to Candidates

As every candidates needs are different, Bisk Education offers a variety of CPA Review formats and packages that are guaranteed* to help you pass the CPA exam on your next sitting. Options include: our Online CPA Review with structured Internet classes and our self-study CPA Review utilizing multimedia CD-ROM software, video lectures, and textbooks.

*Purchase of software required. Call for complete details.

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HotSpot: IFRS & SEC Reporting

Bisk CPA Review offers targeted HotSpot DVDs, each analyzing, simplifying and explaining important CPA exam concepts. Each comprehensive program is packed with valuable tips and comes with a viewers guide.

The latest HotSpot covers IFRS & SEC Reporting. In this program, Robert Monette provides extensive coverage of IFRS accounting standards versus U.S. GAAP for: required financial statements, intangibles, investments, fixed assets, leases, pensions, bonds, deferred taxes, and consolidations. Bob also dis-cusses important aspects of SEC reporting requirements in this program. Bob illustrates these concepts with numerous examples and over 30 multiple-choice questions.

Please contact a sales representative at 1-800-404-7231 or [email protected] for further information about this or any other Bisk program.

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Other Sources of Information for Candidates

Candidates with the 40th edition and corresponding software (versions 14.0, 14.1, and 14.2) also will need Updating Supplement Version 40.3. Updating Supplement Version 40.3 contains summaries of tax changes and inflation-adjusted amounts. (Material in the version 40.3 updating supplement is incorpo-rated within the 41st edition, as appropriate.)

Due to significant changes to the exam, candidates with the 39th and earlier editions and corresponding software (version 13.3 and lower) are strongly encouraged to purchase new materials. Candidates choos-ing to use previous editions of our books must accept responsibility for adequately updating their materials. Candidates should consider the strain that this will add to the already time-consuming process of studying for the exam. Material in the related updating supplements may be reviewed to determine the nature and quantity of information that has changed from one edition to another.

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Recent FASB Pronouncements

ASU No. 2012-02, Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for ImpairmentAn Amendment of the FASB Accounting Standards Codification (Issued 7/12)

The amendments in this Update provide that an entity will have the option not to calculate annually the fair value of an indefinite-lived intangible asset if the entity determines (by assessing qualitative factors) that it is not more likely than not (defined as having a likelihood of more than 50 percent) that the asset is impaired. This new guidance improves consistency in impairment testing among long-lived asset categories.

The amendments are effective for annual and interim impairment tests performed for fiscal years begin-ning after September 15, 2012. Early adoption is permitted. The material in this update is eligible to be tested beginning in the April-May 2013 exam window.

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ASU No. 2012-01, Health Care Entities (Topic 954): Continuing Care Retirement CommunitiesRefundable Advance Fees (Issued 7/12)

The amendments in this Update clarify that an entity should classify an advance fee as deferred revenue when a continuing care retirement community has a resident contract that provides for pay-ment of the refundable advance fee upon reoccupancy by a subsequent resident, which is limited to the proceeds of reoccupancy. Refundable advance fees that are contingent upon reoccupancy by a subsequent resident but are not limited to the proceeds of reoccupancy should be accounted for and reported as a liability.

For public entities (including conduit bond obligors), the amendments in this Update are effective for fiscal periods beginning after December 15, 2012. For nonpublic entities, the amendments in this Update are effective for fiscal periods beginning after December 15, 2013. Early adoption is permitted. The material in this update is eligible to be tested beginning in the July-August 2013 exam window.

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ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amend-ments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU Update No. 2011-05An Amendment of the FASB Accounting Standards Codification (Issued 12/11)

Stakeholders raised concerns that the new presentation requirements about reclassifications of items out of accumulated other comprehensive income would be difficult for preparers and may add unnecessary complexity to financial statements. In addition it is difficult for some stakeholders to change systems in time to gather the information for the new presentation requirements by the effective date of Update 2011-05.

In order to defer only those changes in Update 2011-05 that relate to the presentation of reclassification adjustments, the paragraphs in this Update supersede certain pending paragraphs in Update 2011-05. The amendments are being made to allow the Board time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. While the Board is considering, entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before Update 2011-05.



All other requirements in Update 2011-05 are not affected by this Update, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011. Nonpublic entities should begin applying these requirements for fiscal years ending after December 15, 2012, and interim and annual periods thereafter. The material in this update is eligible to be tested beginning in the July-August 2012 exam window

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ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities An Amendment of the FASB Accounting Standards Codification (Issued 12/11)

An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The material in this update is eligible to be tested beginning in the July-August 2013 exam window.

The differences in the offsetting requirements in U.S. GAAP and IFRS account for a significant difference in the amounts presented in statements of financial position prepared in accordance with U.S. GAAP and in the amounts presented in those statements prepared in accordance with IFRS for certain institutions. This Update is the result of a joint project conducted by the FASB and the IASB to enhance disclosures and provide converged disclosures about financial instruments and derivative instruments that are either offset on the statement of financial position or subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset on the statement of financial position. Entities are required to provide both net and gross information for these assets and liabilities in order to enhance comparability between those entities that prepare their financial statements on the basis of U.S. GAAP and those entities that prepare their financial statements on the basis of IFRS.

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ASU No. 2011-10, Property, Plant and Equipment (Topic 360): Derecognition of in Substance Real EstateA Scope ClarificationAn Amendment of the FASB Accounting Standards Codification (Issued 12/11)

For public entities, the amendments in this Update are effective for fiscal years, and interim periods within those years, beginning on or after June 15, 2012. For nonpublic entities, the amendments are effective for fiscal years ending after December 15, 2013, and interim and annual periods thereafter. Early adop-tion is permitted. The material in this update is eligible to be tested beginning in the July-August 2012 exam window.

Under the amendments in this Update, when a parent (reporting entity) ceases to have a controlling finan-cial interest in a subsidiary that is in substance real estate as a result of default on the subsidiarys nonre-course debt, the reporting entity should apply the guidance in Subtopic 360-20 to determine whether it should derecognize the in substance real estate. Generally, a reporting entity would not satisfy the requirements to derecognize the in substance real estate before the legal transfer of the real estate to the lender and the extinguishment of the related nonrecourse indebtedness.

The amendments in this Update do not eliminate the existing differences in accounting and reporting between U.S. GAAP and IFRS. IFRS guidance on accounting for decreases in ownership of subsidiaries may apply to all subsidiaries, even those that involve in substance real estate.

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ASU No. 2011-09, CompensationRetirement BenefitsMultiemployer Plans (Topic 715-80): Disclosures about an Employers Participation in a Multiemployer PlanAn Amendment of the FASB Accounting Standards Codification (Issued 09/11)

For public entities, the amendments in this Update are effective for annual periods for fiscal years ending after December 15, 2011, with early adoption permitted. For nonpublic entities, the amendments are effective for annual periods for fiscal years ending after December 15, 2012, with early adoption permit-ted. The amendments should be applied retrospectively for all prior periods presented. The material in this update is eligible to be tested beginning in the April-May 2012 exam window.

The amendments create greater transparency in financial reporting by requiring additional disclosures about an employers participation in a multiemployer pension plan. The additional disclosures will increase awareness about the commitments that an employer has made to a multiemployer pension plan and the potential future cash flow implications of an employers participation in the plan.

Currently, U.S. GAAP differs from IFRS in the recognition and measurement guidance for an employers participation in multiemployer plans for both plans that provide pension benefits and plans that provide other postretirement benefits. The IASB issued amendments to IAS 19, Employee Benefits, on June 16, 2011, which should be retrospectively applied in annual periods beginning on or after January 1, 2013. Among other provisions, the IASBs amendments enhance the disclosures about an employers participa-tion in a multiemployer plan. The FASBs amendments in this Update are similar, but not identical, to the IASBs disclosure guidance. The differences primarily relate to the use of information and terminology that is common in U.S. plans (for example, the certified zone status) and the greater level of specificity in the FASBs disclosure requirements.

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ASU No. 2011-08, IntangiblesGoodwill and Other (Topic 350)Testing Goodwill for ImpairmentAn Amendment of the FASB Accounting Standards Codification (Issued 09/11)

The amendments in this Update are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. The material in this update is eligible to be tested beginning in the April-May 2012 exam window.

The objective of this Update is to simplify how entities, both public and nonpublic, test goodwill for impair-ment. The amendments permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for deter-mining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. An entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount.

Previous guidance under Topic 350 required an entity to test goodwill for impairment, on at least an annual basis, by comparing the fair value of a reporting unit with its carrying amount, including goodwill (step one).

International Accounting Standard 36, Impairment of Assets, requires an entity to test goodwill for impair-ment using a single-step quantitative test performed at the level of a cash-generating unit or group of cash-generating units. The test must be performed at least annually and between annual tests whenever there is an indication of impairment. The Board recognizes that this Update does not advance the con-vergence of Topic 350 and IAS 36. The Board concluded that such an effort is beyond the scope of this Update and should be done more broadly, by comprehensively addressing these and other differences in impairment guidance between U.S. GAAP and IFRS.

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Recent GASB Pronouncements

GASB 68, Accounting and Financial Reporting for Pensions (Issued 06/12)

The provisions of this Statement are effective for financial statements for periods beginning after June 15, 2014. Earlier application is encouraged. The material in this Update is eligible to be tested beginning in the January-February 2013 exam window.

Statement 68 replaces the requirements of Statement No. 27, Accounting for Pensions by State and Local Governmental Employers and Statement No. 50, Pension Disclosures, as they relate to governments that provide pensions through pension plans administered as trusts or similar arrangements that meet certain criteria. Statement 68 requires governments providing defined benefit pensions to recognize their long-term obligation for pension benefits as a liability for the first time, and to more comprehensively and com-parably measure the annual costs of pension benefits. The Statement also enhances accountability and transparency through revised and new note disclosures and required supplementary information (RSI).

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GASB 67, Financial Reporting for Pension Plans (Issued 03/12)

The provisions of this Statement are effective for financial statements for periods beginning after June 15, 2013. Earlier application is encouraged. The material in this Update is eligible to be tested beginning in the January-February 2013 exam window.

Statement 67replaces the requirements of Statement No. 25, Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans and Statement 50 as they relate to pension plans that are administered through trusts or similar arrangements meeting certain criteria. The Statement builds upon the existing framework for financial reports of defined benefit pension plans, which includes a statement of fiduciary net position (the amount held in a trust for paying retirement benefits) and a statement of changes in fiduciary net position. Statement 67 enhances note disclosures and RSI for both defined benefit and defined contribution pension plans. Statement 67 also requires the presentation of new information about annual money-weighted rates of return in the notes to the financial statements and in 10-year RSI schedules.

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GASB 66, Technical Corrections-2012-an amendment of GASB Statements No. 10 and No. 62 (Issued 03/12)

The provisions of this Statement are effective for financial statements for periods beginning after Decem-ber 15, 2012. Earlier application is encouraged. The material in this Update is eligible to be tested beginning in the October-November 2012 exam window.

This Statement amends Statement No. 10, Accounting and Financial Reporting for Risk Financing and Related Insurance Issues, by removing the provision that limits fund-based reporting of an entitys risk financing activities to the general fund and the internal service fund type. As a result, governments should base their decisions about fund type classification on the nature of the activity to be reported, as required in Statement No. 54 and Statement No. 34. This Statement also amends Statement No. 62 by modifying the specific guidance on accounting for (1) operating lease payments that vary from a straight-line basis, (2) the difference between the initial investment (purchase price) and the principal amount of a purchased loan or group of loans, and (3) servicing fees related to mortgage loans that are sold when the stated service fee rate differs significantly from a current (normal) servicing fee rate. These changes clarify how to apply Statement No. 13, and result in guidance that is consistent with the requirements in Statement No. 48, respectively.

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GASB 65, Items Previously Reported as Assets and Liabilities (Issued 03/12)

The provisions of this Statement are effective for financial statements for periods beginning after Decem-ber 15, 2012. Earlier application is encouraged. The material in this Update is eligible to be tested begin-ning in the October-November 2012 exam window.

This Statement establishes accounting and financial reporting standards that reclassify, as deferred outflows of resources or deferred inflows of resources, certain items that were previously reported as assets and liabilities and recognizes, as outflows of resources or inflows of resources, certain items that were previously reported as assets and liabilities. This Statement amends the financial statement element classification of certain items previously reported as assets and liabilities to be consistent with the defi-nitions in Concepts Statement 4. This Statement also provides other financial reporting guidance related to the impact of the financial statement elements deferred outflows of resources and deferred inflows of resources, such as changes in the determination of the major fund calculations and limiting the use of the term deferred in financial statement presentations.

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Errata

The following items are in the textbook only, unless otherwise noted. If you find other items that you believe are ambiguous or in error, please contact the Bisk Education editors ([email protected]) with details.

Chapter 4: Simulation 4-4, Page 4-27 (QID 8524). Response table 1 is missing from the simulation. It should follow the Accounting Treatment table. The solution is correct as is.

1. Peabody Inc. had the following property, plant and equipment transactions during the year. For each transaction, choose the correct accounting treatment from the selection list. Each accounting treat-ment may be used once, more than once, or not at all.

Asset Cost Accounting treatment

20 new desk-top computers for support personnel $ 24,000 Cost of parking lot for new warehouse $ 10,000 New process costing softwarethis software will need to be

replaced in 6 years $ 18,000

Painting all of the ceiling tiles in the hallways and common areas of the property $ 9,000

Replacing office windows cracked as a result of an explosion at a neighboring manufacturing plant $ 13,000

Replace the cooling system in the companys current facility with a more modern and fuel efficient model $ 35,000

Chapter 6: Simulation 6-3 solution, Page 6-40, Rows 7 and 8 (QID 9111). The last two rows of the

amortization table do not show correct responses. Below is the correct table:

A B C D E F

1

Date

Interest Payment

Interest Expense

Increase (Decrease) in Carrying Amount of

Bonds

Unamortized (Discount) or Premium

Carrying Amount of Bonds

2 01/01/01 152,270 3,152,270

3 06/30/01 180,000 157,613 (22,387) 129,883 3,129,883

4 12/31/01 180,000 156,494 (23,506) 106,377 3,106,377

5 06/30/02 180,000 155,319 (24,681) 81,696 3,081,696

6 12/31/02 180,000 154,085 (25,915) 55,781 3,055,781

7 06/30/03 180,000 152,789 (27,211) 28,570 3,028,570

8 12/31/03 180,000 151,429 (28,570) 0 3,000,000



Chapter 7: Simulation 7-3 solution, Page 7-49, Item 2. (QID 6192). The entire deferred tax liability should be $27,000 and is classified as noncurrent as the underlying asset generating the temporary difference is also noncurrent. [$25,000 + $30,000 + $35,0000) .30]. Note that for year 2, there would have been a noncurrent deferred tax asset of $5,000 ($20,000 * 25%) in addition to the noncurrent deferred tax liability of $27,000 [$25,000 + $30,000 + $35,0000) .30].

Chapter 8: Simulation 8-2, Page 8-47, Question 1 (QID 9118) should be for Gutter Company, not Smiley.

Simulation 8-4, Page 8-62, Explanation 5 (QID 4100). The explanation should be as follows:

[5] The minimum amortization of pension gain included in accumulated OCI that Athena should include in the calculation of net pension cost is determined, as of the begin-ning of the year, as the amount by which the unrecognized pension gain exceeds 10% of the greater of the projected benefit obligation or the market-related value of plan assets, divided by the average remaining service period of active employees expected to receive benefits under the plan. Accumulated pension gain in OCI, 1/1 $108,000 Less: 10% of fair value of plan assets (i.e., the market-related

value of plan assets), 1/1 ($960,000* 10%) (96,000)

Excess of pension gain $ 12,000 Divide by: Average service life 10 Minimum amortization of pension gain $ 1,200

* At 1/1, the fair value of plan assets exceeds the projected benefit obligation (i.e., $960,000 > $800,000).

Chapter 9: Simulation 9-2, Page 9-45 and 9-63 (QID 6502). On page 9-45, beginning Common Stock should be $900,000, not $1,250,000. On page 9-63, line item 9 should be 6,000 shares of treasury stock, not 5,000 shares. On page 9-63, explanation 2 should be: Additional paid-in-capital: $1,500,000 + $345,000 $45,000 = $1,800,000; not $1,845,000. Stock Options Outstanding is included in APIC for financial reporting purposes. Line item 8 should be $4,995,000, and line item 10 should be $4,941,000.

Simulation 9-4 Solution, Page 9-65 (QID 9024). Line 6 in Table 2 (Common Stock in Treasury) correctly shows 100,000 treasury shares at $5 cost. However, this is due to the 2-for-1 stock split, where 50,000 shares became 100,000, and cost was adjusted from $10 to $5. It is not a function of adding back retired shares.

Chapter 10: Solution 63, Page 10-41 (QID 3276). Explanation should read: permitting the recog-nition of $2,000 profit above the year 1 cost of sales of $8,000 The word cost was omitted in the text.

Simulation 10-3 Solution, Page 10-46, Explanation B3 should read as follows: [$450,000 / ($450,000 + $50,000)] * $750,000 = $675,000. (The multiplication sign preceding $750,000 was omitted.)

Chapter 19: Simulation 19-2, Items 4 and 6, Page 19-62, (QID 6214). The answer choice for items 4 and 6 should be Other Financing Uses, not Other Financing Sources.

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Recently Released AICPA Questions

In April, 2012, the AICPA released fifty multiple-choice questions, two nonresearch simulations, and one research simulation relating to the FAR section of the CPA examination. These questions and their unofficial answers are reproduced here, along with the exclusive Bisk Education explanations. The refer-ence to the Content Specification Outline (CSO) at the end of each answer explanation pertains to the CSO in effect as of January 1, 2012.

The multiple-choice questions in Problems 1 and 2 were labeled medium or hard, respectively, by the AICPA examiners. The AICPA did not state if these questions ever appeared on any exam, whether they were assigned points or merely being pre-tested and earned no points if they did appear on an exam, or if they were now obsolete for some reason.

These questions are intended only as a study aid and should not be used to predict the content of future exams. It is extremely unlikely that released questions will ever appear on future examinations. These questions have been reproduced as received from the AICPA examiners. If candidates encounter what they believe are errors or ambiguities in questions during their actual exams, they should bring them to the attention of the examiners in accordance with the procedures outlined on the AICPAs web site.

Problem 1 MULTIPLE-CHOICE QUESTIONS (medium)

1. A company has the following items on its year-end trial balance: Net sales $500,000 Common stock 100,000 Insurance expense 75,000 Wages 50,000 Cost of goods sold 100,000 Cash 40,000 Accounts payable 25,000 Interest payable 20,000

What is the companys gross profit? a. $230,000 b. $275,000 c. $400,000 d. $500,000 (R/12, FAR, #1, 89701)

2. Burns Corp. had the following items: Sales revenue $45,000 Loss on early extinguishment of bonds 36,000 Realized gain on sale of available-for-sale securities 28,000 Unrealized holding loss on available-for-sale securities 17,000 Loss on write-down of inventory 3,100

Which of the following amounts would the statement of comprehensive income report as other com-prehensive income or loss? a. $11,000 other comprehensive income b. $16,900 other comprehensive income c. $17,000 other comprehensive loss d. $28,100 other comprehensive loss (R/12, FAR, #2, 89702)



3. Baler Co. prepared its statement of cash flows at year-end using the direct method. The following amounts were used in the computation of cash flows from operating activities:

Beginning inventory $200,000 Ending inventory 150,000 Cost of goods sold 1,200,000 Beginning accounts payable 300,000 Ending accounts payable 200,000

What amount should Baler report as cash paid to suppliers for inventory purchases? a. $1,200,000 b. $1,250,000 c. $1,300,000 d. $1,350,000 (R/12, FAR, #3, 89703)

4. Which of the following transactions is included in the operating activities section of a cash flow statement prepared using the indirect method? a. Gain on sale of plant asset b. Sale of property, plant and equipment c. Payment of cash dividend to the shareholders d. Issuance of common stock to the shareholders (R/12, FAR, #4, 89704)

5. Tinsel Co.s balances in allowance for uncollectible accounts were $70,000 at the beginning of the current year and $55,000 at year end. During the year, receivables of $35,000 were written off as uncollectible. What amount should Tinsel report as uncollectible accounts expense at year end? a. $15,000 b. $20,000 c. $35,000 d. $50,000 (R/12, FAR, #5, 89705)

6. Alta Co. spent $400,000 during the current year developing a new idea for a product that was patented during the year. The legal cost of applying for a patent license was $40,000. Also, $50,000 was spent to successfully defend the rights of the patent against a competitor. The patent has a life of 20 years. What amount should Alta capitalize related to the patent? a. $ 40,000 b. $ 50,000 c. $ 90,000 d. $ 490,000 (R/12, FAR, #6, 89706)

7. 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. Decrease Decrease b. Decrease No effect c. No effect Decrease d. No effect No effect (R/12, FAR, #7, 89707)



8. On January 2, Vole Co. issued bonds with a face value of $480,000 at a discount to yield 10%. The bonds pay interest semiannually. On June 30, Vole paid bond interest of $14,400. After Vole recorded amortization of the bond discount of $3,600, the bonds had a carrying amount of $363,600. What amount did Vole receive upon issuing the bonds? a. $360,000 b. $367,200 c. $476,400 d. $480,000 (R/12, FAR, #8, 89708)

9. What type of bonds mature in installments? a. Debenture b. Term c. Variable rate d. Serial (R/12, FAR, #9, 89709)

10. Balm Co. had 100,000 shares of common stock outstanding as of January 1. The following events occurred during the year:

4/1 Issued 30,000 shares of common stock 6/1 Issued 36,000 shares of common stock 7/1 Declared a 5% stock dividend 9/1 Purchased as treasury stock 35,000 shares of its common stock. Balm used the cost

method to account for the treasury stock

What is Balms weighted average of common stock outstanding at December 31? a. 131,000 b. 139,008 c. 150,675 d. 162,342 (R/12, FAR, #10, 89710)

11. The stockholders of Meadow Corp. approved a stock-option plan that grants the companys top three executives options to purchase a maximum of 1,000 shares each of Meadows $2 par common stock for $19 per share. The options were granted on January 1 when the fair value of the stock was $20 per share. Meadow determined that the fair value of the compensation is $300,000 and the vesting period is three years. What amount of compensation expense from the options should Meadow record in the year the options were granted? a. $ 20,000 b. $ 60,000 c. $ 100,000 d. $ 300,000 (R/12, FAR, #11, 89711)

12. At the beginning of the year, the carrying value of an asset was $1,000,000 with 20 years of remain-ing life. The fair value of the liability for the asset retirement obligation was $100,000. At year end, the carrying value of the asset was $950,000. The risk-free interest rate was 5%. The credit-adjusted risk-free interest rate was 10%. What was the amount of accretion expense for the year related to the asset retirement obligation? a. $ 10,000 b. $ 50,000 c. $ 95,000 d. $ 100,000 (R/12, FAR, #12, 89712)



13. Blythe Corp. is a defendant in a lawsuit. Blythes attorneys believe it is reasonably possible that the suit will require Blythe to pay a substantial amount. What is the proper financial statement treat-ment for this contingency? a. Accrued and disclosed b. Accrued but not disclosed c. Disclosed but not accrued d. No disclosure or accrual (R/12, FAR, #13, 89713)

14. Jones Co. had 50,000 shares of $5 par value common stock outstanding at January 1. On August 1, Jones declared a 5% stock dividend followed by a two-for-one stock split on September 1. What amount should Jones report as common shares outstanding at December 31? a. 105,000 b. 100,000 c. 52,500 d. 50,000 (R/12, FAR, #14, 89714)

15. A transaction that is unusual in nature or infrequent in occurrence should be reported as a(an) a. Component of income from continuing operations, net of applicable income taxes b. Extraordinary item, net of applicable income taxes c. Component of income from continuing operations, but not net of applicable income taxes d. Extraordinary item, but not net of applicable income taxes (R/12, FAR, #15, 89715)

16. Giaconda, Inc. acquires an asset for which it will measure the fair value by discounting future cash flows of the asset. Which of the following terms best describes this fair value measurement approach? a. Market b. Income c. Cost d. Observable inputs (R/12, FAR, #16, 89716)

17. A company owns a financial asset that is actively traded on two different exchanges (market A and market B). There is no principal market for the financial asset. The information on the two exchanges is as follows:

Quoted price of asset Transaction costs Market A $1,000 $ 75 Market B 1,050 150

What is the fair value of the financial asset? a. $ 900 b. $ 925 c. $ 1,000 d. $ 1,050 (R/12, FAR, #17, 89717)



18. Brand Co. incurred the following research and development project costs at the beginning of the current year:

Equipment purchased for current and future projects $100,000 Equipment purchased for current projects only 200,000 Research and development salaries for current project 400,000

Equipment has a five-year life and is depreciated using the straight-line method. What amount should Brand record as depreciation for research and development projects at December 31? a. $0 b. $ 20,000 c. $ 60,000 d. $ 140,000 (R/12, FAR, #18, 89718)

19. How should NSB, Inc. report significant research and development costs incurred? a. Expense all costs in the year incurred b. Capitalize the costs and amortize over a five-year period c. Capitalize the costs and amortize over a 40-year period d. Expense all costs two years before and five years after the year incurred(R/12, FAR, #19, 89719)

20. Kenn City obtained a municipal landfill and passed a local ordinance that required the city to operate the landfill so that the costs of operating the landfill, as well as the capital costs, are to be recovered with charges to customers. Which of the following funds should Kenn City use to report the activities of the landfill? a. Enterprise b. Permanent c. Special revenue d. Internal service (R/12, FAR, #20, 89720)

21. At the beginning of the current year, Paxx Countys enterprise fund had a $125,000 balance for accrued compensated absences. At the end of the year, the balance was $150,000. During the year, Paxx paid $400,000 for compensated absences. What amount of compensated absences expense should Paxx Countys enterprise fund report for the year? a. $375,000 b. $400,000 c. $425,000 d. $550,000 (R/12, FAR, #21, 89721)

22. Which of the following funds would be reported as a fiduciary fund in Pine Citys financial state-ments? a. Special revenue b. Permanent c. Private-purpose trust d. Internal service (R/12, FAR, #22, 89722)

23. Belle, a nongovernmental not-for-profit organization, received funds during its annual campaign that were specifically pledged by the donor to another nongovernmental not-for-profit health organization. How should Belle record these funds? a. Increase in assets and increase in liabilities b. Increase in assets and increase in revenue c. Increase in assets and increase in deferred revenue d. Decrease in assets and decrease in fund balance (R/12, FAR, #23, 89723)



24. Ragg Coalition, a nongovernmental not-for-profit organization, received a gift of treasury bills. The cost to the donor was $20,000, with an additional $500 for brokerage fees that were paid by the donor prior to the transfer of the treasury bills. The treasury bills had a fair value of $15,000 at the time of the transfer. At what amount should Ragg report the treasury bills in its statement of financial position? a. $15,000 b. $15,500 c. $20,000 d. $20,500 (R/12, FAR, #24, 89724)

25. In year 2, the Nord Association, a nongovernmental not-for-profit organization, received a $100,000 contribution to fund scholarships for medical students. The donor stipulated that only the interest earned on the contribution be used for the scholarships. Interest earned in year 2 of $15,000 was used to award scholarships in year 3. What amount should Nord report as temporarily restricted net assets at the end of year 2? a. $115,000 b. $100,000 c. $ 15,000 d. $0 (R/12, FAR, #25, 89725)

__________________

Problem 2 MULTIPLE-CHOICE QUESTIONS (hard)

26. Which of the following characteristics of accounting information primarily allows users of financial statements to generate predictions about an organization? a. Reliability b. Timeliness c. Neutrality d. Relevance (R/12, FAR, #26, 89726)

27. Polk Co. acquires a forklift from Quest Co. for $30,000. The terms require Polk to pay $3,000 down and finance the remaining $27,000. On March 1, year 1, Polk pays the $3,000 down and accepted delivery of the forklift. Polk signed a note that requires Polk to pay principal payments of $1,000 per month for 27 months beginning July 1, year 1. What amount should Polk report as an investing activity in the statement of cash flows for the year ended December 31, year 1? a. $ 3,000 b. $ 9,000 c. $ 12,000 d. $ 30,000 (R/12, FAR, #27, 89727)

28. A company that is a large accelerated filer must file its Form 10-Q with the United States Securities and Exchange Commission within how many days after the end of the period? a. 30 days b. 40 days c. 45 days d. 60 days (R/12, FAR, #28, 89728)

29. Each of the following is a component of the changes in the net assets available for benefits of a defined benefit pension plan trust, except a. The net change in fair value of each significant class of investments b. The net change in the actuarial present value of accumulated plan benefits c. Contributions from the employer and participants d. Benefits paid to participants (R/12, FAR, #29, 89729)



30. During the year, Hauser Co. wrote off a customers account receivable. Hauser used the allow-ance method for uncollectable accounts. What impact would the write-off have on net income and total assets?

Net income Total assets a. Decrease Decrease b. Decrease No effect c. No effect Decrease d. No effect No effect (R/12, FAR, #30, 89730)

31. The original cost of an inventory item is above the replacement cost. The inventory items replace-ment cost is above the net realizable value. Under the lower of cost or market method, the inventory item should be valued at a. Original cost b. Replacement cost c. Net realizable value d. Net realizable value less normal profit margin (R/12, FAR, #31, 89731)

32. Kauf Co. had the following amounts related to the sale of consignment inventory: Cost of merchandise shipped to consignee $72,000 Sales value for two-thirds of inventory sold by consignee 80,000 Freight cost for merchandise shipped 7,500 Advertising paid for by consignee, to be reimbursed 4,500 10% commission due the consignee for the sale 8,000

What amount should Kauf report as net profit(loss) from this transaction for the year? a. $ (12,000) b. $ 8,000 c. $ 14,500 d. $ 32,000 (R/12, FAR, #32, 89732)

33. A manufacturer has the following per-unit costs and values for its sole product: Cost $10.00 Current replacement cost 5.50 Net realizable value 6.00 Net realizable value less normal profit margin 5.20

In accordance with IFRS, what is the per-unit carrying value of inventory in the manufacturers state-ment of financial position? a. $ 5.20 b. $ 5.50 c. $ 6.00 d. $10.00 (R/12, FAR, #33, 89733)

34. At the beginning of the year, Cann Co. started construction on a new $2 million addition to its plant. Total construction expenditures made during the year were $200,000 on January 2, $600,000 on May 1, and $300,000 on December 1. On January 2, the company borrowed $500,000 for the con-struction at 12%. The only other outstanding debt the company had was a 10% interest rate, long-term mortgage of $800,000, which had been outstanding the entire year. What amount of interest should Cann capitalize as part of the cost of the plant addition? a. $ 140,000 b. $ 132,000 c. $ 72,500 d. $ 60,000 (R/12, FAR, #34, 89734)



35. Bondholders of Balm Co. converted their bonds into 90,000 shares of $5 par value common stock. In Balms accounting records, the bonds had a par value of $775,000 and unamortized discount of $23,000 at the time of conversion. What amount of additional paid-in capital from the conversion should Balm record? a. $302,000 b. $325,000 c. $348,000 d. $798,000 (R/12, FAR, #35, 89735)

36. On January 1 of the current year, Barton Co. paid $900,000 to purchase two-year, 8%, $1,000,000 face value bonds that were issued by another publicly traded corporation. Barton plans to sell the bonds in the first quarter of the following year. The fair value of the bonds at the end of the current year was $1,020,000. At what amount should Barton report the bonds in its balance sheet at the end of the current year? a. $ 900,000 b. $ 950,000 c. $ 1,000,000 d. $ 1,020,000 (R/12, FAR, #36, 89736)

37. The funded status of a defined benefit pension plan for a company should be reported in a. The income statement b. The statement of cash flows c. The statement of financial position d. The notes to the financial statements only (R/12, FAR, #37, 89737)

38. Martin Pharmaceutical Co. is currently involved in two lawsuits. One is a class-action suit in which consumers claim that one of Martins best selling drugs caused severe health problems. It is reasonably possible that Martin will lose the suit and have to pay $20 million in damages. Martin is suing another company for false advertising and false claims against Martin. It is probable that Martin will win the suit and be awarded $5 million in damages. What amount should Martin report on its financial statements as a result of these two lawsuits? a. $0 b. $ 5 million income c. $15 million expense d. $20 million expense (R/12, FAR, #38, 89738)

39. Wood Co.s dividends on noncumulative preferred stock have been declared but not paid. Wood has not declared or paid dividends on its cumulative preferred stock in the current or the prior year and has reported a net loss in the current year. For the purpose of computing basic earnings per share, how should the income available to common stockholders be calculated? a. The current-year dividends and the dividends in arrears on the cumulative preferred stock should

be added to the net loss, but the dividends on the noncumulative preferred stock should not be included in the calculation.

b. The dividends on the noncumulative preferred stock should be added to the net loss, but the current-year dividends and the dividends in arrears on the cumulative preferred stock should not be included in the calculation.

c. The dividends on the noncumulative preferred stock and the current-year dividends on the cumulative preferred stock should be added to the net loss.

d. Neither the dividends on the noncumulative preferred stock nor the current-year dividends and the dividends in arrears on cumulative preferred stock should be included in the calculation.

(R/12, FAR, #39, 89739)



40. The fair value for an asset or liability is measured as a. The appraised value of the asset or liability b. The price that would be paid to acquire the asset or received to assume the liability in an orderly

transaction between market participants c. The price that would be received when selling an asset or paid when transferring a liability in an

orderly transaction between market participants d. The cost of the asset less any accumulated depreciation or the carrying value of the liability on

the date of the sale (R/12, FAR, #40, 89740)

41. Hudson Corp. operates several factories that manufacture medical equipment. The factories have a historical cost of $200 million. Near the end of the companys fiscal year, a change in business climate related to a competitors innovative products indicated to Hudsons management that the $170 million carrying amount of the assets of one of Hudsons factories may not be recoverable. Management identified cash flows from this factory and estimated that the undiscounted future cash flows over the remaining useful life of the factory would be $150 million. The fair value of the factorys assets is reliably estimated to be $135 million. The change in business climate requires investigation of possible impairment. Which of the following amounts is the impairment loss? a. $15 million b. $20 million c. $35 million d. $65 million (R/12, FAR, #41, 89741)

42. On January 1, year 1, Peabody Co. purchased an investment for $400,000 that represented 30% of Newman Corp.s outstanding voting stock. For year 1, Newman reported net income of $60,000 and paid dividends of $20,000. At year end, the fair value of Peabodys investment in Newman was $410,000. Peabody elected the fair value option for this investment. What amount should Peabody recognize in net income for year 1 attributable to the investment? a. $ 6,000 b. $ 10,000 c. $ 16,000 d. $ 18,000 (R/12, FAR, #42, 89742)

43. On June 19, Don Co., a U.S. company, sold and delivered merchandise on a 30-day account to Cologne GmbH, a German corporation, for 200,000 euros. On July 19, Cologne paid Don in full. Relevant currency exchange rates were:

June 19 July 19 Spot rate $988 $ 995 30-day forward rate 990 1,000

What amount should Don record on June 19 as an account receivable for its sale to Cologne? a. $197,600 b. $198,000 c. $199,000 d. $200,000 (R/12, FAR, #43, 89743)



44. On June 1 of the current year, a company entered into a real estate lease agreement for a new building. The lease is an operating lease and is fully executed on that day. According to the terms of the lease, payments of $28,900 per month are scheduled to begin on October 1 of the current year and to continue each month thereafter for 56 months. The lease term spans five years. The company has a calendar year end. What amount is the companys lease expense for the current calendar year? a. $ 86,700 b. $ 161,838 c. $ 188,813 d. $ 202,300 (R/12, FAR, #44, 89744)

45. On March 21, year 2, a company with a calendar year end issued its year 1 financial statements. On February 28, year 2, the companys only manufacturing plant was severely damaged by a storm and had to be shut down. Total property losses were $10 million and determined to be material. The amount of business disruption losses is unknown. How should the impact of the storm be reflected in the companys year 1 financial statements? a. Provide no information related to the storm losses in the financial statements until losses and

expenses become fully known b. Accrue and disclose the property loss with no accrual or disclosure of the business disruption

loss c. Do not accrue the property loss or the business disruption loss, but disclose them in the notes

to the financial statements d. Accrue and disclose the property loss and additional business disruption losses in the financial

statements (R/12, FAR, #45, 89745)

46. On January 1, Fonk City approved the following general fund resources for the new fiscal period: Property taxes $5,000,000 Licenses and permits 400,000 Intergovernmental revenues 150,000 Transfers in from other funds 350,000

What amount should Fonk record as estimated revenues for the new fiscal year? a. $5,400,000 b. $5,550,000 c. $5,750,000 d. $5,900,000 (R/12, FAR, #46, 89746)

47. Which of the following is one of the three standard sections of a governmental comprehensive annual financial report? a. Investment b. Actuarial c. Statistical d. Single audit (R/12, FAR, #47, 89747)

48. A government makes a contribution to its pension plan in the amount of $10,000 for year 1. The actuarially determined annual required contribution for year 1 was $13,500. The pension plan paid benefits of $8,200 and refunded employee contributions of $800 for year 1. What is the pension expenditure for the general fund for year 1? a. $ 8,200 b. $ 9,000 c. $ 10,000 d. $ 13,500 (R/12, FAR, #48, 89748)



49. 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% is 3.312. What amount of restricted net assets is reported in the year the pledge was received? a. $ 66,240 b. $ 80,000 c. $ 86,240 d. $ 100,000 (R/12, FAR, #49, 89749)

50. Which of the following financial categories are used in a nongovernmental not-for-profit organiza-tions statement of financial position? a. Net assets, income, and expenses b. Income, expenses, and unrestricted net assets c. Assets, liabilities, and net assets d. Changes in unrestricted, temporarily restricted, and permanently restricted net assets (R/12, FAR, #50, 89750)

__________________

Problem 3 Simulation 1

JRM Co. is in the process of closing its books for the year ended December 31, year 2.

The following business events are not properly reflected in JRMs December 31, year 2, unadjusted trial balance:

1. The controller determined that half of the recorded rent expense is attributable to year 3.

2. JRM depreciates its property, plant and equipment using the straight-line method over 10 years. The property, plant and equipment had an original cost of $20,000 and a salvage value of $5,000.

3. JRM uses the percentage-of-sales method to determine the addition to bad debt expense. Uncol-lectible accounts receivable for year 2 was estimated to be 0.25%.

4. On December 31, year 2, a customer declared bankruptcy and its account receivable of $855 is uncollectible.

5. Life insurance premiums for the period ended December 31, year 2, of $650 for key members of man-agement are included in prepaid expense.

6. Interest of $300 was earned and outstanding on notes receivable during year 2. The note receivable is due at the end of year 5.

7. Income taxes for year 2 are estimated to be $3,000.

Based on the business events above, calculate the adjustments necessary to JRMs unadjusted trial bal-ance by entering the appropriate debit and credit amounts in columns D and E, respectively. Enter the debit adjustments as positive values and credit adjustments as negative values.



A B C D E F

1 Account name Trial balance debit Trial balance

(credit) Adjustment

debit Adjustment

(credit)

Adjusted trial balance debit/(credit)

balance 2 Cash 1,000 0 3 Interest receivable 0 0 4 Accounts receivable 25,000 0 5 Allowance for doubtful

accounts

0

(2,500)

6 Prepaid expenses 1,000 0 7 Property, plant and

equipment

20,000

0

8 Accumulated depreciation property, plant and equipment

0

(10,000)

9 Notes receivable 20,000 0 10 Accounts payable 0 (33,000) 11 Taxes payable 0 (1,000) 12 Equity 0 (1,500) 13 Sales 0 (300,000) 14 Cost of goods sold 195,000 0 15 Salaries, office, and

general expenses

75,000

0

16 Rent expense 10,000 0 17 Tax expense 1,000 0 18 Bad debt expense 0 0 19 Depreciation expense 0 0 20 Insurance expense 0 0 21 Interest income 0 0 22 348,000 (348,000)

(R/12, FAR, 9088)



Problem 3 SIMULATION 2

For each situation below, record the appropriate journal entry for Richter Corp.

Assume the company uses the straight-line method for amortization and depreciation and that all amorti-zation and depreciation is recorded on December 31 of each year. Richter uses separate general ledger accounts to record accumulated amortization for each intangible asset.

To prepare each entry:

Select from the list provided the appropriate account name. If no entry is needed, select No entry required. An account may be used once or not at all for each entry.

Enter the corresponding debit or credit amount in the appropriate column. Round all amounts to the nearest dollar. All rows may not be required to complete each entry.

Account Title Choices Accumulated amortization-patent Investment

Accumulated depreciation Legal expense Amortization expense Patents

Cash Prepaid patent expense Depreciation expense Research & Development expense

Equipment Trademark Goodwill No entry required

Goodwill impairment loss

A B C 1 April 1, year 1:

Richter purchased a patent with a 10-year life for $50,000 from DD Co. DD incurred costs of $35,000developing the patent. Prepare the journal entry, if any, to record the patent.

2 Account name Debit Credit 3 4 5 6

7 July 1, year 1:

Richter purchased scientific equipment used in product development studies having potential alter-native uses for future products. The equipment cost $75,000 and the company paid an additional $4,000 for delivery. The equipment has an estimated useful life of 5 years. Prepare the journal entry, if any, to record the purchase of the equipment.




13 October 1, year 1: Richter received an unfavorable judgment in defense of a trademark and paid $25,000 in fees to their law firm. Prepare the journal entry, if any, to record the legal fees.


19 December 31, year 1:

Prepare the journal entry, if any, to account for the patent purchased on April 1, year 1. 20 Account name Debit Credit 21 22 23 24


Prepare the journal entry, if any, to account for the scientific equipment purchased on July 1, year 1.26 Account name Debit Credit 27 28 29 30


Richter had previously recorded $300,000 of goodwill related to an acquisition. At December 31, year 1, the carrying value of the identifiable net assets acquired exceeded their fair value by $50,000. The implied fair value of the goodwill was $310,000. Prepare the journal entry, if any, to adjust the carrying value of goodwill.


(R/12, FAR, 9089)



Problem 3 SIMULATION 3: RESEARCH

ABC Corp., an issuer, is planning to implement an employee share purchase plan. Substantially all employees that meet the limited employment qualifications may participate on an equitable basis. Which section of the authoritative guidance best outlines the criteria that allow a company to provide a share purchase plan that does not require compensation cost to be recognized?

Enter your response in the answer fields below. Unless specifically requested, your response should not cite implementation guidance. Guidance on correctly structuring your response appears above and below the answer fields.

FASB ASC: - - - (R/12, FAR, 9090)

__________________

Solution 1 MULTIPLE-CHOICE ANSWERS (medium)

1. (c) Gross profit is the excess of sales over cost of goods sold. It does not consider all operating expenses. ($500,000 $100,000 = $400,000) (Chapter 1-3-3, CSO: 1.3.2)

2. (c) Items that previously were included in the equity section as a separate component of owners equity are required to be reported in other comprehensive income. OCI must be classified by their nature, in one of these categories: foreign currency items, pension adjustments, unrealized gains and losses on certain investments in debt and equity securities, and gains and losses on cash flow hedging derivative instruments. Only the unrealized holding loss on AFS securities of $17,000 qualifies as an item of OCI. (Chapter 11-3-2, CSO: 1.3.3)

3. (b) Accounts Payable decreased by $100,000 (from $300,000 to $200,000). That means Baler paid $100,000 more for goods than it actually purchased. Since Baler purchased $1,150,000 ($150,000 + $1,200,000 $200,000), total cash paid to suppliers for inventory purchases must have been $1,250,000 ($1,150,000 + $100,000). (Chapter 14-1-3, CSO: 1.3.5)

4. (a) Cash flows from operating activities include the cash effects of transactions and other events that enter into the determination of net income, including the gain on sale of plant assets. The sale of fixed assets is an investing activity. The payment of dividends and the issuance of common stock are financ-ing activities. (Chapter 14-2-1, CSO: 1.3.5)

5. (b) The allowance account has an ending balance of $55,000. Prior to the bad debt adjustment, the allowance balance is $35,000 [$70,000 $35,000 in write offs], so an adjustment to bad debt expense and the allowance account for $20,000 is required. (Chapter 2-2-2, CSO: 2.2.0)

6. (c) Future economic benefits deriving from R&D activities are uncertain in their amount and timing; therefore, most R&D costs are expensed in the year incurred. Legal fees for both the license application and successful defense of the patent are capitalized because they offer probable future benefits. They are amortized over the remaining useful life of the patent. Atla should capitalize $90,000 ($40,000 + $50,000). (Chapter 5-1-2, CSO: 2.6.0)

7. (a) When the redeemable gift certificates are sold, the sales price collected represents unearned revenue and an unearned revenue account is credited (i.e., increased). As the certificates are redeemed, the earned revenue is recognized, decreasing the unearned portion. Lapsed certificates would also decrease unearned revenue, but would increase Gain on Lapsed Certificates rather than Revenue account. In either case, the Deferred Revenue account is decreased. (Chapter 7-1-6, CSO: 2.8.0)

8. (a) The effect of the amortization entry is to increase the carrying value of the bonds. Since the carrying amount is $363,600, the amount that Vole received upon issuing the bonds would be less the amortized discount of $3,600, or $360,000. (Chapter 6-2-3, CSO: 2.9.2)



9. (d) Serial bonds are bonds issued at the same time but having different maturity dates. These are also called installment bonds because they provide a series of installments for repayment of principal. Debenture bonds are unsecured bonds; they are not supported by a lien or mortgage on specific assets, but they mature at the same time. Term bonds all mature on a specified date. Variable rate bonds have a fluctuating interest rate, but mature at the same time. (Chapter 6-4-1, CSO: 2.9.2)

10. (b) For basic EPS, weighted average common stock outstanding includes shares outstanding the entire period, shares issued during the period, and shares where all of the conditions of issuance have been met. Issuance of stock and reacquisition of stock during the period are prorated for the period outstanding. Stock dividends, stock splits, and reverse stock splits change the total number of shares outstanding but not the proportionate shares outstanding. Therefore, stock dividends, stock splits, and reverse stock splits are reflected retroactively for all periods presented. (Chapter 16-3-2, CSO: 3.6.0)

Total Shares Outstanding

Months Outstanding

Stock Dividend

Weighted Average

100,000 3/12 1.05 = 26,250 130,000 2/12 1.05 = 22,750 166,000 1/12 1.05 = 14,525 174,300 2/12 = 29,050 139,300 4/12 = 46,433

139,008

11. (c) The cost of services received from employees in exchange for awards of share-based com-pensation generally shall be measured based on the grant-date fair value of the options. The account Stock Options Outstanding is increased on the grant date. The subsequent exercising, forfeiture, or laps-ing of the stock options reduces this account. (Chapter 9-5-3 CSO: 2.13.5)

January 1, Year 1 Deferred Compensation Cost (option/compensation value at grant date) 300,000

Stock Options Outstanding 300,000 December 31, Year 1, 2, 3 Wages and Compensation Expense 100,000

Deferred Compensation Cost 100,000

12. (a) An asset retirement obligations (ARO) must be recorded at fair value in the accounting period in which it occurs and in which its amount can be reasonably measured. AROs incur depreciation and accretion expenses each year. Accretion expense is offset with an increase to the liability account, and, at the end of the assets life, the liability account will have a balance equal to the amount needed to settle the retirement obligation. Accretion expense is calculated by multiplying the balance of the recorded liability by the companys credit-adjusted discount rate each year, so the amount of accretion expense for the year is $10,000 ($100,000 15%). (Chapter 7-2-5, CSO: 3.2.0)

13. (c) Where the loss is considered reasonably possible, no charge should be made to income but the nature of the contingency should be disclosed. This treatment also applies to probable losses that cannot be reasonably estimated. (Chapter 7-1-5, CSO: 3.5.0)

14. (a) Jones should report 105,000 shares outstanding (50,000 shares 1.05 2). (Chapter 9-4-6, CSO: 2.10.0)

15. (c) A transaction that is unusual in nature or infrequent in occurrence, but not both, is reported as a component of income from continuing operations. A transaction must be both unusual in nature and infrequent in occurrence to be classified as an extraordinary item. The nature and financial effects of an unusual item or an infrequently occurring item should be disclosed on the face of the income statement, or alternatively, in the notes to the financial statements. (Chapter 11-2-2, CSO: 3.8.0)



16. (b) The income approach uses valuation techniques to convert/discount future amounts to a single present amount. The measurement is based on the value indicated by current market expectations about those future amounts. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset, often referred to as the current replacement cost. Observable inputs are inputs for the valuation technique; they are not a technique in and of themselves. (Chapter 1-2-4, CSO: 3.9.0)

17. (c) Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It is assumed that the transac-tion would occur in the principle market for the asset or liability, or in the absence of such, the most advantageous market for the asset or liability. The most advantageous market is the market with the price that maximizes the amount that would be received for the asset or minimizes the amount that would be paid to transfer the liability. In determining the most advantageous market, transaction costs must be netted against the price of the asset. The fair value price is not adjusted for incremental direct transaction costs. Market A would yield a net $925 ($1,000-$75) while Market B would yield $900 ($1,050-$150), so Market A is the most advantageous, and the fair value of the asset would be $1,000. (Chapter 1-2-4, CSO: 3.9.0)

18. (b) Materials, equipment, facilities, or intangibles that are acquired for a current R&D project and have no alternative future use in other R&D projects should be expensed in the period in which acquired. If alternative future uses are expected, whether in other R&D activities or in normal operations, these items should be recorded as assets and the cost should be amortized over their useful lives by periodic charges to R&D expense. If, at any point, these assets are no longer deemed to have alternative future uses, the remaining unamortized cost is charged to R&D expense for the period. Depreciation expense would be $20,000 ($100,000 / 5 years). (Chapter 5-2-2, CSO: 3.18.0)

19. (a) Research activities are those aimed at the discovery of knowledge that will be useful in devel-oping or significantly improving products or processes. Development activities are those concerned with translating research findings and other knowledge into plans or designs for new or significantly improved products or processes. Since future economic benefits deriving from R&D activities are uncertain in their amount and timing, most R&D costs are required to be charged to expense the year in which incurred. (Chapter 5-2-3, CSO: 3.18.0)

20. (a) Enterprise funds are used to account for a governments business-type operations that are financed and operated like private businesseswhere the governments intent is that all costs of provid-ing goods or services to the general public are to be recovered primarily through user charges (operating revenue). Permanent funds are used to account for and report resources that are restricted to the extent that only earnings, and not principal, may be used for purposes that support the reporting governments programs. Internal service funds are used to account for in-house business enterprise activities; that is, to account for the financing of goods or services provided by one government department or agency to other departments or agencies of the government. Special revenue funds are used to account for and report the proceeds of specific revenue sources that are restricted or committed to expenditure for speci-fied purposes other than debt service or capital projects. (Chapter 19-3-3, CSO: 4.1.2)

21. (c) Enterprise funds must be used to account for a governments business-type operations that are financed and operated like private businesseswhere the governments intent is that all costs of pro-viding goods or services to the general public on a continuing basis are to be recovered primarily through user charges (operating revenue). Enterprise funds use normal accrual accounting. Compensated absence expense is $425,000 ($400,000 + $150,000 $125,000). (Chapter 18-3-3, CSO: 4.2.3)

22. (c) Fiduciary funds are used to account for a governments fiduciary or stewardship responsibili-ties as an agent (agency funds) or trustee (trust funds) for other governments, funds, organizations, and/ or individuals. Fiduciary funds cannot be used for any general programs of the primary government. Fiduciary funds are included in fund financial statements but not in the government-wide statements, and include: pension trust funds; investment trust funds; private purpose trust funds; and agency funds. Special revenue and permanent funds are governmental funds. Internal service funds are proprietary funds. (Chapter 18-4-4, CSO: 4.2.4)



23. (a) A recipient that accepts assets from a donor on behalf of a specified beneficiary recognizes the fair value of those assets as a liability concurrent with the recognition of the assets. Therefore, both assets and liabilities will increase as a result of the pledged funds. (Chapter 20-1-4, CSO: 5-2-1)

24. (a) Generally, contributions received are measured at their fair values and recognized as reve-nues or gains in the period received and as assets, decreases of liabilities, or expenses depending on the form of the benefits received. They shall be reported as restricted support or unrestricted support. Ragg should report $15,000 in its statement of financial position. (Chapter 20-1-5, CSO: 5-2-1)

25. (c) Entities are required to classify net assets based upon the existence or absence of donor-imposed restrictions. Net assets are classified into three categories: permanently restricted, temporarily restricted, and unrestricted. Contributions with donor-imposed restrictions are reported as restricted support. Restricted support increases permanently restricted net assets or temporarily restricted net assets. Since the restrictions will be met in year 3, the $15,000 is considered temporarily restricted. (Chapter 20-1-3, CSO: 5-2-2)

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Solution 2 MULTIPLE-CHOICE ANSWERS (hard)

26. (d) Fundamental qualitative characteristics of information are relevance and faithful representa-tion. Information is relevant if it is capable of making a difference in a decision by helping users to form predictions about the outcomes of past, present, and future events or to confirm or correct prior expecta-tions. Components of relevance are predictive value, confirmatory value, or both. Information is faithfully represented if it represents what it purports to represent. Components of faithful representation are that it is complete, neutral, and free from error. Reliability exists when information represents what it purports to represent, coupled with an assurance for the user that it has representational faithfulness. Timeliness is an enhancing qualitative characteristic. Neutrality is free from bias. (Chapter 1-6-5, CSO: 1.2.1)

27. (a) Cash flows from investing activities include (1) making and collecting loans (excluding those acquired specifically for resale), (2) acquiring and disposing of property, plant and equipment, and other productive assets, and (3) purchases, sales, and maturities of debt and equity securities (excluding those acquired specifically for resale. Borrowing money and repaying amounts borrowed, or otherwise settling the obligation represents cash flows from financing activities. Polk should report $3,000 in investing activities, and $27,000 in financing activities. (Chapter 14-2-2, CSO: 1.3.5)

28. (b) There are three categories of filers: (1) non-accelerated filers, (2) accelerated filers, and (3) large accelerated filers. Non-accelerated filers are issuers that have a public float of less than $75 million. Accelerated filers are issuers that have a public float of at least $75 million but less than $700 million. Large accelerated filers must file the Form 10-Q with the SEC within 40 days after the end of the companys fiscal year. Large accelerated filers are issuers that have a public float of $700 million or more. (Chapter 17-7-4, CSO: 1.4.0)

29. (b) Net plan assets include amounts contributed by the employer (and by employees for a con-tributory plan) and amounts earned from investing the contributions, less benefits paid. The net change in the actuarial present value of accumulated plan benefits is not part of net plan assets. (Chapter 8-8-1, CSO: 1.5.5)

30. (d) The journal entry to record the write-off of an account is as follows: Allowance for Uncollectible Accounts XX

Accounts ReceivableJoe Doe XX

This entry would decrease both accounts receivable and allowance for uncollectible accounts; however, it would have no impact on net income or total assets. (Chapter 2-2-2, CSO: 2.2.0)



31. (c) Valuation of inventory items is required at the lower of cost or replacement cost (commonly referred to as market). Market cannot exceed the net realizable value (ceiling) of the good (i.e., selling price less expected costs to sell), and market should not be less than this net realizable value reduced by an allowance for a normal profit margin (floor). In this problem, the replacement cost exceeds net realiz-able value, so market is defined as NRV. Since the original cost is greater than defined market, the item will be carried at the lower of market/NRV amount. (Chapter 3-2-4, CSO: 2.3.0)

32. (c) Cost of goods sold will be two-thirds of the goods shipped (including two-thirds of the freight), but all of the advertising and commission will be deducted from gross profit to determine net profit. (Chapter 3-2-2, CSO: 2.3.0)

Revenue $ 80,000 Less: Cost of consigned goods $ 72,000 Plus Freight for consigned goods 7,500

Total cost of consigned goods $ 79,500 Percentage sold 67% Cost of Goods Sold (rounded) (53,000) Gross Profit $ 27,000 Less advertising (4,500) Less commission (8,000) Net Profit $ 14,500

33. (c) Under IFRS, inventory is carried at the lower of cost or net realizable value (best estimate of the net amounts inventories are expected to realize). This amount may or may not equal fair value. The net realizable value of $6.00 is lower than the historical cost of $10.00. (Chapter 17-3-6, CSO: 2.3.0)

34. (c) The cost of assets constructed for the use of the business should include all directly related costs; cost of direct materials, cost of direct labor, additional overhead incurred, and interest costs incurred during the construction period. If the average accumulated expenditures of an asset exceed the amount of any specific borrowings associated with the asset, the excess should be capitalized at the weighted average of interest rates applicable to other borrowings of the business. (Chapter 4-2-1, CSO: 2.4.0)

Average expenditure during year) $200,000 2/12 $200,000 600,000 8/12 400,000 300,000 1/12 25,000 Average expenditures $625,000 Specific borrowings 500,000 12% $60,000 Excess expenditures 125,000 10% 12,500 Total capitalized interest $72,500

35. (a) Convertible bonds provide the bondholder the option of converting the bond to capital stock, typically common stock. Using the book value method, the conversion of the bonds into common stock is generally recorded by crediting the paid-in capital accounts for the carrying amount of the debt at the date of the conversion, less any cost associated with the conversion. The carrying amount of the bonds on the date of conversion is the $775,000 face value less the $23,000 unamortized discount. The journal entry would be: (Chapter 6-4-3, CSO: 2.9.3)

Bonds Payable 775,000 Bond Discount 23,000 Common Stock (90,000 $5 par) 450,000 APIC (to balance) 302,000

36. (d) Trading securities are debt and equity securities that are bought and held principally for the purpose of selling them in the near term to generate profits on short-term differences in price. They are reported at fair value. Unrealized holding gains and losses are included in current earnings for trading securities. Barton should report the investment at the fair value of $1,020,000. (Chapter 2-5-3, CSO: 2.5.1)



37. (c) The funded-status amount is measured as the difference between the fair value of plan assets and the benefit obligation, with the benefit obligation including all actuarial gains and losses, prior service cost, and any remaining transition amounts. If the benefit obligation is larger than the fair value of plan assets, the plan is underfunded, and a net liability is reported. Conversely, if the fair value of the plan assets is larger, the plan is overfunded, and a net asset is reported on the statement of financial position (i.e., balance sheet). (Chapter 8-8-2, CSO: 2.13.4)

38. (a) Reasonably possible means more than remote, but less than probable. Where the loss is considered reasonably possible, no charge should be made to income but the nature of the contingency should be disclosed. This treatment also applies to probable losses that cannot be reasonably estimated. Gain contingencies should be disclosed but not recognized as income. Care should be taken to avoid misleading implications as to the likelihood of realization. Therefore, Martin should report $0 on its finan-cial statements, but disclose both events in the notes. (Chapter 7-1-5, CSO: 3.5.0)

39. (c) The numerator for basic EPS is fairly simple to determine. The income number used for basic EPS is income from continuing operations adjusted for the claims by senior securities. Senior security claims generally refer to preferred stock and are adjusted in the period earned. All preferred stock divi-dends declared reduce income to arrive at IAC. Cumulative preferred stock dividends of the current period, even though not declared, also reduce income to arrive at IAC. Both the dividends on the noncu-mulative preferred stock and the current-year dividends on the cumulative preferred stock should be added to the net loss. (Chapter 16-3-2, CSO: 3.6.0)

40. (c) Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, conceptually an exit price. (Chapter 5-2-4, CSO: 3.9.0)

41. (c) A long-lived asset shall be tested for recoverability whenever events or changes in circum-stances indicate that its carrying amount may not be recoverable. Impairment is the condition that exists when the carrying amount of a long-lived asset, or asset group, exceeds its fair value. An impairment loss shall be recognized only if the carrying amount of a long-lived asset is not recoverable and exceeds its fair value. The carrying amount (book value) is not recoverable if it exceeds the sum of the undis-counted cash flows expected to result from the use and eventual disposition of the asset. The amount of an impairment loss is the difference between an assets book and fair value. The new book value is used as a basis for depreciation. Since the carrying amount of $170,000 exceeds the undiscounted cash flows of $150,000 an impairment loss must be recognized. The $35,000 impairment loss is the difference between the book value of $170,000 and the fair value of $135,000. (Chapter 4-4-1, CSO 3.12.0)

42. (c) Entities may choose to measure eligible items at fair value (the fair value option) that are not currently required to be measured at fair value. The decision to elect the fair value option is applied instru-ment by instrument, is irrevocable, and is applied only to an entire instrument. A business entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. The Investment in Newman would be increased by 30% of the net income and decreased by 30% of the dividends, resulting in a year end carrying amount of $412,000 ($400,000 + 18,000 6,000). Since the fair value was $410,000, Peabody had an unrealized loss of $2,000. This loss is netted against the investment income previously recognized of $18,000 for a $16,000 net income impact. Dividends do not affect net income (they reduce the Investment account). (Chapter 1-2-5, CSO: 3.9.0)

43. (a) At the date a transaction is recognized, each asset, liability, revenue, expense, gain, or loss arising from a foreign currency transaction should be measured and recorded in the functional currency of the recording entity by use of the exchange rate (i.e., spot rate) in effect at that date. Don Co should record an account receivable of $197,600 on June 19 (200,000 .988). (Chapter 12-5-4, CSO: 3.11.0)

44. (c) Under operating leases, lessees recognize rent as expense over the lease term in a systematic and rational. The lease term is five years, or 60 months. Total lease payments are $1,618,400 ($28,900 56 months). This expense is allocated on a straight line basis over the 60-month term. Seven months expense should be recognized, or $188,813 ($26,973.33 7). (Chapter 8-3-2, CSO: 3.14.0)



45. (c) An entity shall not recognize subsequent events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after the balance sheet date but before financial statements are issued or are available to be issued. Some nonrecognized subsequent events may be of such a nature that they must be disclosed to keep the financial statements from being misleading. Since property losses were of a material nature, the entity should disclose the nature of the event and an esti-mate of its financial effect or a statement that such an estimate cannot be made. (Chapter 12-1-3

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